.,JL-^ 




STUDIES IN HISTORY, ECONOMICS AND PUBLIC LAW 

EDITED BY THE FACULTY OF POLITICAL SCIENCE OF 

COLUMBIA UNIVERSITY 

IN THE CITY OF NEW YORK 

Volume IX] [Number 2 



GERMAN WAGE THEORIES 



A HISTORY OF THEIR DEVELOPMENT 



BY 

JAMES W. CROOK, Ph.D. 

Sometime University Fellow in Economics 
Assistant Professorjof Political Economy, Amherst College 




COLUMBIA UNIVERSITY 

Beta) ^nxk 

1898 



COLUMBIA UNIVERSITY 

Faculty of Political Science. 

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:U) 



6 7i"" 



II 

GERMAN WAGE THEORIES 

A HISTORY OF THEIR DEVELOPMENT 



STUD/ES IN HISTORY, ECONOMICS AND PUBLIC LAW 

EDITED BY THE FACULTY OF POLITICAL SCIENCE OF 

COLUMBIA UNIVERSITY 

IN THE CITY OF NEW YORK 

Volume IX] [Number 2 



GERMAN "WAGE THEORIES 



A HISTORY OF THEIR DEVELOPMENT 



JAMES W. CROOK, Ph.D. 

Sometime University Fellow in Economics 
Assistant Professor of Political Economy, Amherst College 




COLUMBIA UNIVERSITY 
JSctD porfe 

1898 



o 



\ 






iriLJ 



t Vd 



TABLE OF CONTENTS 

PAGB 

Introduction . 7 

CHAPTER I 
Predecessors of Hermann 15 

CHAPTER II 
Hermann 23 

CHAPTER III 
Hermann's Successors 33 

CHAPTER IV 
Criticism 55 

CHAPTER V 
Von Thunen 68 

CHAPTER VI 
The Socialists 94 

CHAPTER VII 

SCHULZE-GXVERNITZ IO7 

(V) 



INTRODUCTION 



Ever since political economy received its modern form at 
the hands of Adam Smith, the theory of wages has been in 
controversy. What is true of many economic questions is true 
of this one: the germs of later and more complete develop- 
ments are found in the Wealth of Nations. Problems peculiar 
to the periods of historical evolution since the time of Adam 
Smith have brought into prominence one or more of the truths 
which he perceived. The system of natural liberty which 
he so tenaciously advocated brought the demand for its com- 
plement and condition — equality. But if the history of this 
century records a growing recognition of freedom for all 
classes, it has also disclosed an obstacle to the realization 
of freedom, viz., economic weakness. The demand for equality 
comes from the economically weak, the wage receivers. 
Hence, the investigation of the economic forces which deter- 
mine the incomes of those classes becomes an important in- 
quiry. Thus from a practical point of view the work done in 
this field by scientists of more than one nation is amply 
justified. 

If science is not international, it ought to be so, to such an 
extent that the important work of one country be not unknown 
to another. A survey of the somewhat voluminous German 
literature upon the subject of wages shows that, for half a cen- 
tury after the publication of the Wealth of Nations, almost no 
original work is to be found. That there was no lack of acad- 
emic activity is clear from the number of university text-books 
issued. These, however, for the most part repeat, summarize 
or but slightly modify the reasoning and conclusions of Adam 
303] 7 



8 GERMAN WAGE THEORIES \lOA^ 

Smith. The conditions of economic life in the two countries 
at this period were very different. There was wanting on Ger- 
man soil the stimulating influence of unsolved practical prob- 
lems of economics. The "industrial revolution" developed 
more slowly on the continent. There were lacking those 
conditions so favorable to the growth of industry. England's 
insular position allowed a degree of political unity and com- 
parative certainty of political destiny such as was hardly pos- 
sible to a continental state closely surrounded by jealous 
neighbors or agitated by the contending forces inherent in a 
loose federation.'' The political solution must precede the 
economic. The English people have also possessed, to a re- 
markable degree, those moral capacities which underlie any 
considerable industrial progress, the capacity to labor and to 
co-operate. If we add to these facts the favorable climate, 
easy communication by land and sea, and abundant supplies 
of coal and iron, we may reasonably account for England's 
industrial leadership.'' 

The series of remarkable inventions, beginning with that of 
Hargreaves, established the factory system, stimulated the 
growth of industrial towns, and brought into contrast the in- 
terests of laborers and employers. While this contrast was 
not exactly a new one, yet it was never sufficiently intense till 
then to force the legal barriers to labor combination. The 
place which the labor problem has occupied in the British 
mind may be roughly measured by that legislative accumula- 
tion known as the Factory Acts, which have been a model for 
similar legislation by other nations. 

All this is in contrast with the German condition. There 
the old industrial order with its restrictions and conservative 
methods prevailed long after England had replaced the old 
with the new. Schulze-Gaevernitzs has described the methods 

^ List, National System, p. 53. 

* Hobson, Modern Capitalism, p. 73 ff. 

„ Grossbetrieb, p. 34, 



305] INTRODUCTION g 

which prevailed in the i8th century throughout Germany, 
" Everything was done by rule. Spinning came under public 
inspection and the yarn was collected by officials. The privi- 
lege of weaving was confined to the fi'aternity of the guild. 
Methods of production were strictly prescribed; public in- 
spectors exercised control. Defects in weaving were visited 
with punishment. Moreover, the right of dealing in cotton 
goods was confined to the confraternity of the merchant guild; 
to be a master weaver had almost the significance of a public 
office. Besides other qualifications, there was the condition 
of a formal examination. The sale also was under strict 
supervision ; for a long time a fixed price prevailed, and a 
maximum sale was officially prescribed for each dealer. The 
dealer had to dispose of his wares to the weaver, because the 
latter had guaranteed to him a monopoly of export trade." ^ 
How comparatively little progress Germany had made with 
machine industry under these conditions is indicated by the 
following facts. In 1882, 42 per cent, of the German textile 
industry was still conducted in the home or domestic work- 
shop, while only 38 per cent, was carried on in factories em- 
ploying more than 50 persons. More weavers were still en- 
gaged with hand looms than with power-looms, and the latter 
was so little developed that the hand loom could still hold its 
own in many articles. Knitting, lace making and other minor 
textile industries are still in the main home industries.^ List, 
in 1844, laments the comparative infancy of German manufac- 
tures and continually seeks to impress upon his readers the 
industrial superiority of England. Marx finds England the 
paradise of capitalistic production, and although familiar with 
German conditions draws no important illustrations from his 
native country. Writing as late as 1873 he declared that polit- 
ical economy was in Germany a foreign science, there having 

^ Quoted by Hobson, Modern Capitalism, p. 78. 

* Quoted from Social Peace, p. 113, by Hobson, p. 78. 



IQ GERMAN WAGE THEORIES [306 

existed there no soil for its growth.' Lassalle found German 
laborers unorganized and so inured to custom as to be almost 
deaf to his passionate appeals. 

These differences between the two countries may adequately 
account for the great disparity in theoretic development. The 
existence of problems calls for solution; solution requires con- 
structive theoretic foundations. That this is the natural order 
is abundantly shown in finance. Financial difficulties or prob- 
lems have necessarily preceded any considerable determination 
of the science of finance in modern nations. The new condi- 
tions and new relations involved in machine production, or the 
great industry (Grossbetrieb) bring into relief the interests of 
classes and make necessary a scientific determination of both 
productive and distributive forces. 

Experience has demonstrated that it is usually in connection 
with industries other than agricultural that the problems pe- 
culiar to the relation of employer and employed come to the 
front. The classes subordinated come to feel their position, they 
startle society by proclaiming some unusual doctrine or by per- 
forming some destructive act. Then the scientist sets about 
understanding the phenomena. This is the usual sequence, 
but the work of von Thiinen would seem to furnish an excep- 
tion to this order. As an agriculturalist he became impressed 
with the dangers involved in the existence of the economic gulf 
separating classes, in advance of the feelings of those classes 
themselves. As early as 1826 he began a series of original 
investigations in connection with agricultural production, which 
in the course of twenty-five years yielded results that for orig- 
inality and value may be compared with some of the best work 
of Ricardo. Moreover, as proof of his practical interest, and 
to give his theories of distribution a practical test, he used his 
agricultural estate for purposes of social experiment. When 
Rau published the first edition of his political economy (1826) 

1 Preface to 2d ed. of Capital. 



307] INTRODUCTION 1 1 

Germany had made some start in national activity which gave 
rise to industrial problems. Seven years later Hermann broke 
the parallel course of English and German economic writing, 
and started Germans on a path of their own, which they have 
not wholly ceased to follow to this day. 

Before studying theories themselves, it will be useful to take 
some notice of terminology. The term wages as used by the 
different authors does not always include the same kinds of 
income. It is not unnatural that men, writing under different 
•economic conditions, and at periods so separated by time as the 
writers brought under review in this essay, should differ in the 
use of a word like wages, or a phrase like wage-class. There is 
great lack of unanimity even now, as will be seen by a compar- 
ison of the advocacy of different or competing views held by 
Walker, George or Sidgwick. As to definition, the Germans did 
not always follow Adam Smith. The latter said that the wages 
of labor were everywhere understood to be what they usually 
were, when the laborer was one person and the owner of the 
stock which employs him another.^ This would confine wages 
to the income of laborers employed by owners of capital in the 
course of operations undertaken for a profit. It will not be 
necessary to point out here how Adam Smith departed from 
"this definition in his treatment of wages. 

Schmalz defines wages as the income which men receive from 
-others for important or unimportant, honorable or despicable 
services. Accordingly, he classes generals, state ministers 
and even pensioners as wage-earners. There is nothing in 
his subsequent treatment to reveal the gain of such a classifi- 
cation.^ Rau broadens the meaning to include what the 
undertaker saves out of his business to pay for his own activ- 
ity — the equivalent of what he would otherwise have to pay as 
■wages. This is the modern conception of wages of superin- 

1 Wealth of Nations, Rogers' ed., 1869, v. i, p. 69. 
"^ StaatswirthschaftsleJire in Brief en, v. I, p. 23. 



12 GERMAN WAGE THEORIES [308 

tendence.' However, in the 8th ed. he considers that the 
most important case arises when over against the worker there 
is a wage-giver with whom he contracts for definite wages.^ 
Fulda does a similar thing when he makes a part of the in- 
come of the capitalist his wages. But he has a different meas- 
ure for the amount. He says the business man, during the 
time he is in business, must satisfy his needs for food and 
shelter according to the degree of his culture. He must also 
hold his capital in that condition which is required to prose- 
cute his business. The part which his necessary support re- 
quires is his necessary wages; the part which his capital 
requires is his necessary profit.^ Hermann restricts wages to 
a payment by one person to another for common services ren- 
dered. He distinguishes services as common, talented, fixed 
and official. For the reward of common labor he would use 
wages (Lohn). For the reward of labor requiring talent and 
education, honorar. The payments made by university stu- 
dents to professors for their lectures are at the present time 
called by that name. For fixed employment he uses salary 
(Gehalt), and for official services fee (Gage).4 V. Thiinen 
would also restrict wages to payment for hired labor, but he is 
most anxious to distinguish between the reward for labor as 
such, and that which is due to the tools the laborer may em- 
ploy, including the simplest implements. The reward for the 
use of tools is interest, that for labor proper is wages.s 

Many writers do not consider it important to state what they 
mean by wages, leaving the reader to infer from the general 
treatment the sense in which the word is used. We are, 

* Grundsdtze der Volkswirshschaftslehre, 4lh ed., 1841, p. 201. 

* Ibid., p. 252. 

' Grundsdtze der Oekonontisch-politischen oder Kameralwissenschaflen, 1820, 
2d Ed., § 186. 

^ Staatswirthschaftliche Uniersttchttngeti, 2d ed., 1 870, p. 460. 

*Der Isolirte Slaat, Part ii, p. 78. 



309] INTRODUCTION 1 2 

therefore, warned against apparent differences due to differ- 
ences of terminology merely. 

The plan to be pursued in this essay has occasioned some 
thought, and the arrangement finally adopted is not without 
objection. But since the chief object in making the study is to 
discover, if possible, progress of thought on this subject, chro- 
nology had to be sacrificed, in some instances, to a logical 
order. Hence while von Thiinen appears after Hermann in 
obedience to the time order of their work, yet von Thiinen 
appears after Brentano and Philippovich, because he is not so 
clearly a follower of Hermann as they are. It has often been 
remarked by students of the theoretical Economics of the 
Germans that there exists but a slender thread of logical con- 
nection between the great German writers of the last one hun- 
dred years. Indeed it has been said that the attitude toward 
the wages-fund theory is the only point common to most of 
them. But a study of the treatment by the Germans of the 
wages-fund, will not include the work of von Thiinen, as is 
shown by Professor Taussig's admirable "Wages and Capital." 
Wishing to exhibit, if possible, the treatment of the entire 
wages question by the Germans, passing over rather lightly 
the part in each author which treats of the wages-fund, because 
Professor Taussig has made that familiar to English readers, 
and trying at the same time to give unity to my work, I have, 
so far as possible, grouped writers who appear to show the 
largest number of points of contact, and at the same time in- 
cluded writers of eminence who, though not connected closely 
with German predecessors or successors, have made important 
contributions to the subject. Hence all the German writers 
treated here are placed in two groups. One contains Schmalz, 
Fulda, Sartorius, Lueder, Kraus, Rau, Hermann, Brentano, 
Roscher, Mithoff, Mangoldt and Philippovich. Hermann is 
the centre of this group, and the others are important only as 
they lead up to him, depend upon him, deviate from him, or 
throw light upon him. Apart from those who come first, the 



J. GERMAN WAGE THEORIES [310 

common element in nearly all is the method of treatment. 
Other points of contact will appear as we proceed, but this is 
the most conspicuous. In this group there is a real unity of 
method and interest. The other group contains von Thiinen, 
Karl Marx and Schulze-Gaevernitz. These authors do not 
belong together in the sense that the others do. They have 
so little in common that it is not even necessary to speak of 
them as a group except for convenience. They are included 
in this discussion because of their importance. Von Thiinen 
was a genius, about whom it is desirable that American students 
should know more. A fair-minded and exhaustive study of 
Marx's theory of distribution, the full materials for which have 
but recently come into our hands, has yet to be made in Eng- 
lish. Any earnest study of his theory of wages is welcome if 
it adds anything to our real understanding of Marx. Schulze- 
Gaevernitz is noticed here because he is the chief representa- 
tive in Germany of those writers who regard wages as a 
residual share, and because the theory which he represents is 
exciting the interest of German students. 

One who goes to Germany to hear lectures on the principles 
of Economics, or who undertakes a study of the literature of 
the same, must not expect to find a body of doctrines devel- 
oped independently on German soil, and uninfluenced by the 
work of other nations. The German professor has ever on his 
lips the names of Adam Smith, Ricardo and John Stuart Mill. 
Each economist is followed, criticized or expounded according 
to the knowledge and idiosyncrasies of the instructor. The 
present German thinking has its roots in the work of the 
English school; and, if the' German work is to be understood, 
the English work must be mastered first. The same thing is 
true of the literature. The foundations have been laid across 
the Channel. Hence in exposition, the theories of Adam 
Smith and Ricardo are often employed in this study as 
standards, and in this way the English and German ideas are 
brought into comparison. 



CHAPTER I 

PREDECESSORS OF HERMANN, I776-1832 

While this period is the least important of all in positive 
results, yet a consideration of the work of a few men who 
wrote during this time will repay the student who desires to 
know the beginnings of things, and who loves to trace the de- 
velopment of method and theoretic spirit. When Adam 
Smith published the " Wealth of Nations," the physiocratic 
doctrines of distribution were dominant. The struggle be- 
tween the views entertained by the Physiocrats and those 
introduced by Adam Smith was not so bitter as such struggles 
are apt to be. There appears to have been in Germany com- 
paratively little objection to Adam Smith's statement. On 
the contrary, adherents sprang up wherever the new doc- 
trines became known. Within a few years German students 
were listening to lectures delivered by University Professors 
who declared themselves followers of Adam Smith. How- 
ever, there were some who, for various reasons, could not 
or would not change views already formed and expressed, and 
who, though partaking of the early advantages of this century, 
took little notice of the new movement. Among these is 
Schmalz,^ whom Roscher calls the last of the Physiocrats. 

'Theodor Anton Heinrich Schmalz was born 1760, died 1831. He studied 
Theology and Philosophy at the University of Gottingen, 1777-1780. He became 
a Professor of Law at Rinteln in 1788, but the following year was called to 
Konigsberg, becoming Director of the University in 1801. In 1803 he was trans- 
ferred to Halle as a judicial counselor and Professor, where he remained till 1808. 
When the new University at Berlin was established he became its first Director in 
1 8 10, and as Professor of Law continued in the service of the Prussian king. 

As a writer his life was full of activity, his efforts centering principally upon 
3"] 15 



1 5 GERMAN WAGE THEORIES [312 

According to Schmalz, society is composed of classes 
or groups, differing in standard of life. Yet there is an average 
standard to which all groups are tending. The poor are 
spurred by ambition to approach the average, while shame 
restrains the rich from maintaining a standard far above the 
average. Notwithstanding the spur of ambition, wages are 
governed by a law. That which one is accustomed to con- 
sume in his class during the time that the work is being done 
determines the wages he will receive. Two reasons are 
assigned for this rate: i. The laborer demands it for a life of 
respectability among his class. 2. It is the laborer's right. 
The question of right enters, because wages are obtained from 
men and not from nature. When a man sacrifices his time to 
work for me, it is right that I give him as much for it as he 
consumes in that time. He has also a right to receive as much 
for his labor as the companions of his class consume during 
the time in which the labor is being performed. There is no 
reason why he should consume more at my cost. If I give 
him less, I do him an injustice. If I give him more, I make 
him a present. Wages correspond to the amount here indi- 
cated, and that which men habitually pay by contract must 
have back of it the force of natural right. 

It is not necessary to point out how far short of scientific 
precision this reasoning of Schmalz falls. Adam Smith's reas- 
oning may leave something to be desired, but it is better than 
that of Schmalz. This consuming rate of Schmalz is not the 
same as the "lowest rate consistent with common humanity" 

Politics, Law and Economics. In Politics he favored absolutism. In Law he 
represented the standpoint of natural right. In Economics the Physiocratics' 
views seemed to him the soundest. He compared the doctrines of Colbert and 
his followers to the Ptolemaic system of Astronomy, and those of the Physiocrats to 
the Copernican system, and regarded Adam Smith as a fad (see Roscher, 
Gesc/iic/Ue, p. 498-9). For his treatment of systematic Economics see Haiuibuch 
der Staatswirtschaft, Berlin, 1808, and Staatswirtschaftslehre in Brie/en, 
Berlin, 1818. For his characterization by Roscher, see the latter's Geschichte 
der National. Oeiottofiii/c in Deutschland, p. 498. 



313] PREDECESSORS OF HERMANN 1 7 

of Adam Smith; the latter was a consumption rate sufficient 
for both the workman and his family during the entire year; 
the former was a rate for the workman during the time of 
work. Adam Smith had in mind a corrective in a decrease of 
the supply of labor, if the rate fell below the standard. 
Schmalz was appealing to conceptions of natural right. 

Fulda^ is important only as a transition from the old to the 
new point of view. While holding with Adam Smith that the 
state of wages is at once a sign and an effect of the different 
states of society, he attempts to show that wages may be af- 
fected by different applications of capital. To his mind ma- 
chinery is inimical to the interests of labor. Wages are more 
favorably influenced if capital is applied to agriculture rather 
than to trade, since in manufacture labor is displaced by the 
preponderance of capital in the form of machinery. From this 
point of view the national interests of labor may be promoted by 
change of national industry and without any increase of capital. 

Sartorius,'' Lueder and Kraus were prominently instru- /, 
mental in introducing the teachings of Adam Smith into Ger- // 
many. In the extent to which they appeal to his views for an 
explanation of wages, they differ widely. Sartorius seems to 
have paid attention to the last page only of Adam Smith's \ 
chapter on wages, when he points out that the price of labor 
is regulated by (i) the demand for labor, and (2) the price of 
the necessaries and conveniences of life, and then follows this 
Avith a discussion of the influence of scarcity and plenty upon 

1 Friedrich Carl von Fulda, born 1774, died 1847, student at Gottingen 1794- 
97, and received in 1798 a call to Tiibingen as Professor of Kameralwissenschaft, 
a position which he occupied nearly forty years. His views on Economics are 
found in his Grundsdtse der ceconovtisch-politischen oder Kameralwissenschaften, 
Tubingen, 1816, 2d ed., 1820. 

* George Friedrich Sartorius was born 1766 and died 1828. After studying 
;at Gottingen he was, in 1802, appointed by that University Professor of Philoso- 
phy, and remained in that position, although called to both Berlin and Leipsig as 
Professor of Kameralwissenschaft. 



,8 GERMAN WAGE THEORIES [314 

these two factors. Lueder ' likewise uses only a part of Adam 
Smith, holding that wages will be above the minimum only 
when the funds from which wages are drawn increase. 
Kraus,' however, constituted himself the special interpreter 
of Adam Smith to the Germans; accordingly, his book read in 
connection with the table of contents is found to be not a word 
for word repetition of the " Wealth of Nations," but a good 
analysis of it. Thus his treatment of wages is made to include 
all the main points of Adam Smith. 

Up to this point the German economists stated a necessary 
minimum wage; a new idea was originated by Lotz,3 who first 
stated the conditions of maximum wages. This is the begin- 
ning of a new and more fertile treatment of the subject. Lotz 
pointed out that competition could operate only within certain 
limits, the lowest limit being subsistence wages and the upper 
limit that point at which wages swallow up the profits of capi- 
tal. All economists since Lotz have observed some such 
limits. Rau was the first to elaborate the point. 

Rau '' published the first edition of his Political Economy in 
1826. The doctrine of wages formulated in the first edition 
received scarcely any modification in the successive nine re- 
visions, of which the last appeared in 1870. Rau was the first 
great German economist to recast the science on the principles 
laid down by Adam Smith. He may, therefore, be considered 

1 August Ferdinand Lueder, born 1760, died 1819. He was Professor of History 
in Braunschweig, 1797, and in 1810 Professor of Philosophy in Gottingen, where 
he remained till two years before his death. He published in 1800-1804, Na- 
tionalindustrie tind Staatsioirlhschaft. 

' Christian Jakob Kraus, born 1753, died 1807. He studied at Konigsberg and 
Gottingen, and in 1780 became Professor of Practical Philosophy in Konigsberg, 
a place which he kept till his death. 

' Johann Friedrich Eusebius Lotz, born 177 1, died 1838. He studied in Jena. 
He held many government appointments and was for a lime Professor of Law and 
Economics at Bonn. He published, in 1821, Handbuch der Staatswirthschafts- 
lehre. 

* Karl Heinrich Rau, born 1792, died 1870. 



315] PREDECESSORS OF HERMANN ig 

the founder in Germany of that individuahstic school which 
Adam Smith founded in England. While previous writers, 
who may be called followers, were for the most part mere 
copyists, Rau makes departures in statement and analysis. 
He also attempts to adapt the matter to the conditions of his 
own country. Rau was the first to enunciate the doctrine that 
wages are only a special form of price. In this he is truly a. 
predecessor of Hermann. To understand Rau's discussion, 
we must recur to his doctrine of price. Price results from the 
combined action of three forces: (i) the value of the exchang^- 
ing good, (2) the cost of the exchanging good, (3) competition. 
Price cannot go higher than the value of the good to the 
buyer; it cannot go below the cost to the producer; it is de- 
termined somewhere between these limits by the relation of 
supply and demand. Turning now to his discussion of wages, 
the value of labor is regulated by the purposes for which it is 
appHed. In most cases it is applied to secure a profit. 
When so employed, the undertaker is in a position to give 
high or low wages according to the amount of net product left 
over after other expenses are paid. It might go so high as to 
swallow up the pure profit of the undertaker, and even so high 
as to decrease interest and rent, but it cannot destroy them, 
because in that case undertaking must cease. But from the 
fact that even pure profit usually exists, it is evident that we 
need other determining principles. 

We take a further step in advance by applying the principle 
of costs to labor, which, in skilled occupations, includes sub- 
sistence and previous outlay for training ; while in simple 
occupations, subsistence, broadly interpreted to include family 
support during the intervals of idleness, is the principal 
consideration. Costs are determined by (i) the usual manner 
of life of the laborer and his family in given conditions 
of climate, customs, and the degree of culture of the 
people as a whole, as well as that of the peculiar class to 
which the laborer may happen to belong; (2) the price of the 



20 GERMAN WAGE THEORIES V^^^ 

commodities which enter into the laborer's consumption list. 
In this way is determined the cost of production of labor. 
Wages cannot remain permanently below this cost, for in that 
case the supply of labor would fail. Here we have the limit to 
the fall of wages. The limit to the rise of wages has already 
been given. Between the limits there is a wide margin. The 
force that determines whether wages shall tend to the maxi- 
mum or to the minimum, or remain intermediate, is competi- 
tion : the competition of labor for capital and the competition 
of capital for labor. The supply of labor consists in the num- 
.'ber of men who are resolved to work for wages and are seek- 
iing work. The demand for labor consists in the amount 
-of capital which is destined to be applied to the employment 
of laborers in profitable undertaking. If the population is very 
large in comparison with the amount of capital, then wages 
may sink to the minimum or below it before correction 
com^s. In the opposite case, it may rise till reduced profits 
correct the tendency. 

In these views Rau differed but slightly from the English 
•school as known in his time. Adam Smith and Ricardo both 
conceived a hypothetical price which they called natural, 
above and below which actual market price might fluctuate. 
Rau designated an upper and lower limit between which actual 
price might fluctuate. Rau's lower limit is really iden- 
tical with Ricardo's central point. The fluctuations in both 
cases are caused by the same influence, i. e., relation of supply 
and demand. In designating the upper limit, as the value of 
the good to the buyer, the first step was taken toward regard- 
ing the influence of the consumer on price, which in the hands 
of Hermann developed into a theory designed to refute the 
wages- fund doctrine. There is one other respect in which Rau 
and the English school differ: as to the part of the theory 
upon which special emphasis shall be laid. After Ricardo 
makes the distinction between natural and market wages, he 
^ays almost nothing further about market wages. He seems 



217] PREDECESSORS OF HERMANN 21 

to have developed his system of distribution from the point of 
view of his conception of natural wages. If so, he would nat- 
urally lay greater emphasis upon it, as his readers would thereby 
the better understand him. In the passages in which he re- 
pudiates supply and demand as determinants of prices, he is 
to be understood not as denying their influence on market 
price, but as denying their power to determine natural price, in 
which he is chiefly interested. It was not so with Rau 
Ricardo's determinant of natural wages became for him one 
of the limits of fluctuation and the determinants of the fluctua- 
tions assumed the central place. We might therefore expect 
from Rau a more careful study and statement of the principles 
of supply and demand in their application to the problern of 
wages. To say that wages depend upon the relation of supply 
and demand is to say almost nothing at all. We want some- 
thing more than a definition of the terms employed in one 
short sentence. Such expressions as that, when capital is 
large in comparison with population wages rise, and when 
population is large in comparison with capital wages fall, are 
too indefinite, and bring in direct comparison things which 
strictly are incapable of comparison. 

The foregoing discussion shows that Rau is far superior tO' 
his German predecessors. But, in justice to them, it must not 
be forgotten that he wrote under the influence not only of 
Adam Smith, but of Malthus, McCulloch, Torrens, Ricardo, 
and James Mill. This is proved by the fact that in the first 
edition of his work on political economy, he makes frequent 
reference to these authors whose works had been translated 
into German or French. It is also proved by the fact that 
many of his general propositions are found in the English 
works. For instance, his remarks on the proportions between 
capital and labor as determining wages are found in substan- 
tially the same form in James Mill. 

Any lack of economic analysis tending to mar the work of 
the early German economists is fully atoned for by the publi- 



22 GERMAN WAGE THEORIES [318 

cation in 1832 of Hermann's "Economic Investigations," 
This work marks a great advance on previous theoretical 
economic studies, and even to-day exercises considerable in- 
fluence on economic thought. 



CHAPTER II 

HERMANN ^ 

Historically considered, the "Economic Investigations" 
of Hermann possesses a unique interest. Unlike Adam 
Smith, whose " Wealth of Nations " appeared at the end of a 
long career, Hermann began his extended activity in economic 
literature with the publication of the work by which he is 
chiefly known, and which won from Roscher the judgment 
that it placed its author " among the most eminent economists 
of the nineteenth century." 

To the reviewer of the progress of economic theory in Ger- 
many, the work marks an important advance. Finance and 
Administration were ably and independently treated previous 
to 1832. But of the many names which appear among con- 
tributors on pure Economics during the half century following 
the publication of the " Wealth of Nations," Rau is really the 
only one of note, and in power of analysis and independent 
thought he is much inferior to Hermann. That the work of 
the former was always more familiar to ordinary students must 
be admitted; but that is due to the fact that Hermann's style 
is more difficult, while Rau's book has decided pedagogical 
advantages. 

It is to Hermann's credit that, living in a country which was 
then far behind England in commercial and industrial develop- 
ment, and hence behind her in the development of capitalistic 
production, and the advanced relations of laborer and em- 
ployer, he should have been the first to assail, with some 

1 Freidrich Benedikt Wilhelm v. Hermann, born 1795, died 1868. 
319] ^3 



24 GERMAN WAGE THEORIES [^20 

measure of success, the wages-fund theory of the English 
economists, and substitute for it a theory which appears in 
nearly every systematic treatise on political economy in Ger- 
many since his day. 

I. 

In the early German wage literature there appears little to 
which Hermann is indebted. The numerous writers previous 
to Rau are either avowedly expositors of Adam Smith or 
mere copyists. He, however, owes something to Rau. Rau 
was the first German economist to treat wages as only a special 
form of price and to apply the general principles already 
evolved under his treatment of price to a solution of the prob- 
lem of wages. 

It is from this point of view that Hermann opens his dis- 
cussion of wages. According to both men, the general prin- 
ciple is supply and demand, but to Hermann this, so stated, 
means but little. We need to trace back the causal connection 
one step further. Taking the demand side first, there are 
three factors which determine price. ^ First, the individual 
value of the good to the buyer. Secondly, the buyer's ability 
to pay for the good. Thirdly, the disposition to buy as 
cheaply as possible; the buyer will therefore pay no more than 
the price reduced by the competition of the sellers. Turning 
now to the supply side of the problem. There are here, too, 
three factors. First, the seller must receive as much as the 
good has cost. Secondly, the disposition to get as much as 
possible; the seller will therefore get as much above cost as 
the buyers raise the price. Thirdly, much depends upon the 
exchange value of the means of exchange. If in the above 
principles we will substitute for seller, buyer and good, the 
words laborer, employer and labor, we shall have in outline 
the principles according to which wages are determined." 

' Staats-wirthschaftliche Untersuchungen, 1870, p. 390-459. 
' Staatswirthschaftlichc Untersuchungen, p. 460-487. 



22 1] HERMANN 2$ 

Unfortunately, Hermann never finished the discussion, hav- 
ing treated the subject from the standpoint of demand only. 
How he would have considered the problem of population 
under the cost of production of laborers we have no means of 
knowing. Although the treatment as we have it is defective, 
yet we may adopt a point of view according to which the ap- 
parently one-sided treatment may yield results. If we note 
that population does not readily respond to fluctuations in de- 
mand for laborers, we may assume the supply side of the 
problem as a fixed quantity. Then a correct statement of the 
principles of demand may yield the determinant of wages for 
short periods; i. e., assuming Hermann's method to be a 
correct one. 

Hermann's views may be conveniently considered under 
five heads. 

I. The first important question is, to whom, or to what class 
is labor valuable? who are the real buyers of labor? To 
these questions Adam Smith, Ricardo and James Mill had 
given the unequivocal answer, the employer of labor — the 
capitalist. But Hermann answered that the real consumer of 
labor power, and hence the class to which it has value, is the 
class which consumes the laborers' products. The nature of 
the case is not changed by the fact that the producer hires 
and rewards the labor directly, while the consumer is uncon- 
scious of the labor involved in the product. The consumer 
is nevertheless a buyer of labor. The undertaker is considered 
by Hermann a mere labor purveyor, a sort of consumers' 
agent, who for his outlay in wages seeks a recompense in the 
price of the goods made by labor. 

This doctrine, not elaborated, but rather treated as self- 
evident, is the foundation-stone of Hermann's theoretic struc- 
ture, and upon its truth or falsity will depend the soundness or 
weakness of his alleged contribution to this subject. 

n. While Menger properly has the credit of working out in 
detail, and tracing to some important result the conception of 



26 GERMAN WAGE THEORIES [322 

stages in the productive process, the idea is clearly suggested 
by Hermann. Only a small fraction of the number of laborers 
engaged in productive activities are employed in putting on the 
finishing touches to commodities. Many are getting out the 
raw materials, and between miners and agriculturalists at one 
end of the line, and labourers ministering directly to con- 
sumers' needs at the other, there are whole groups of laborers 
pushing along the commodities from a lower to a higher stage 
in the transformations from crude products of nature to the 
manifold refined forms suited to serve man's wants. 

Hermann makes use of the theory to establish a point which 
seems not to have attracted the attention of subsequent writers. 
Most theorists since Adam Smith have felt the necessity of 
distinguishing between particular and general wages. They 
considered that when they had determined a general law of 
wages they had not accounted for differences of wages in dif- 
ferent employments. Hence we have repeated so often both 
in English and German treatises Adam Smith's familiar 
points : wages in particular employments are determined by 
differences in agreeableness of employment, expense of learn- 
ing, trust reposed, etc. Hermann offers a different view when 
he proclaims a difference in wages according as the employ- 
ment is remote from, or adjacent to, the final stage. Bakers 
and butchers always receive higher wages than weavers, and 
those are in the most unfavorable position who are laboring in 
the initial stages of production, as in mining and agriculture. 
The explanation of these alleged facts is that the final prod- 
ucts are subject to constant daily demand, and the dealer in 
such commodities can and must offer his laborers higher 
wages than he who produces what can remain for a consider- 
able time in one stage. The dealer in the intermediate prod- 
ucts must make good his wage outlay in the price of the 
product, and in order to insure this he keeps wages at as mod- 
erate a figure as possible. All who purchase from him buy as 
cheaply as possible. This means that a constant pressure is 



^23] HERMANN 2/ 

•brought to bear on all those in the previous labor steps to 
limit the wage outlay. " Upon all the production stages there 
rules the economic motive to furnish to the final purchaser as 
cheaply as possible the labor contained in the product." The 
producer of the final product is not so pushed, since his com- 
;<modity is subject to pressing daily demand. 

In connection with this there is a subordinate point which 
•is worth mentioning. What are the general principles accord- 
ing to which a change of price of goods in the final stage will 
-affect wages in the earlier stages? Hermann answers that 
this depends upon the time during which the product delays 
at a given stage. The shorter the time, the more sensitively 
-•will the rate of wages respond to changes in the stages above. 
It will also depend upon the readiness with which undertakers 
and laborers can betake themselves to other employments. 
Something depends also upon whether the raw material or 
the partly-manufactured product is limited to a definite use, 
or is capable of several applications. 

III. Mere demand or desire is powerless to affect wages 
unless there exists also the ability to pay. To know this, one 
must know the source of payment. Adam Smith and his 
immediate followers considered income and capital as the true 
•sources of all payments for wages. Ricardo laid emphasis 
-upon capital alone. Against Ricardo's view Hermann took a 
■^decided stand. A mere statement of his argument reveals 
strong feeling. Whoever would get the labor he needs or 
wants must have the means to pay. In the case of household 
servants it is plain that they are paid from income. With the 
fluctuation of incomes, fluctuates the effective demand for 
servants. It is evident that to pay them out of the stock of 
.accumulated wealth would be wastefulness. 

There is no labor which does not pertain to a last consumer. 
'This is as true of labor, for labor contractors or undertakers, 
as of labor in direct personal service. However numerous the 
technical steps in the production may be, the finished product 



28 GERMAN WAGE THEORIES [324 

at last becomes an object of use, either temporary or lasting. 
All the intervening steps from the beginning to the end have 
been taken for the sake of this ultimate use. And the final 
recompense for all previous outlays must find its source in the 
payments for the use of these final objects. " Not merely all 
the labor applied to every labor step in producing the imme- 
diate product, but also the labor contained in the replacing 
and use of all kinds of fixed capital, is at last to be made good 
by the payments which the ultimate consumer of the product 
makes." ^ The wage outlay of the last, as well as of all 
previous steps of manufacture, is contained in the price of the 
final product. Capital cannot be the source of wage payment^ 
for if restitution out of the product fails, production and hence 
wage-payment must cease. If production were continued 
without reference to the final demand, the depreciation in value 
of the raw products would be a severe experimental demon- 
stration to the producer that his capital was not the source of 
wage payment. Hence we get the following result. The true 
and continuous source of the compensation of production is 
the income of the buyer of products for his own use. Capital 
is only the help-means to production, not the source of reward. 
" It is unthinkable that wages depend upon the greatness of 
the disposable capital in relation to the number of laborers." *^ 
It depends in the long run always upon the price which the 
active buyers can and are willing to pay for the product. " To 
hold that the source of wages is capital is not merely a theoret- 
ical error, but also in practical affairs is a doctrine of the most 
serious importance ; because it fortifies the laborer in the super- 
ficial view that the undertaker is his wage-giver, and that upon 
him depends the scale of his wages. If the laborer holds to 
such an appearance of the truth and becomes hostile to the 
undertaker, participating in acts of violence against him, there 
is no cause for surprise. That the doctrine of science should 

1 Stoats. Unters. , p. 473. ' /ii^., p. 477. 



-325] HERMANN 29 

strengthen the selfish procedure of ignorant laborers in strikes, 
by its doctrine that the source of wages is the capital of the 
"* entrepreneur/ shows the need for caution." * 

IV. The two considerations, need of labor service and abil- 
ity to pay, are operative from the side of the " entrepreneur." But 
these are conditions which relate to but one of the contractors. 
It is obvious that in general under the regime of free competi- 
tion, whoever employs labor will not grant higher pay than 
the lowest at which he can obtain the appropriate service in 
-sufficient quantity. How low wages may go is influenced 
somewhat by the competition of laborers. Unfortunately 
Hermann did not profess to have treated the wage question 

■from the side of supply in any thorough manner. We do not 
find that he took account of numbers and the forces which 
-determine them. He confined himself to a few remarks on 
forces which prevent the ready access of labor to the market. 
Xong before Cairnes' wrote on non-competing groups, 
Hermann had said that efficient competition in the labor 
market exists only between groups with approximately like 
technical skill. A man's power to compete is limited to the 
employments with which he has some familiarity. For an 
•entire group, the duration of this limitation is the time which 
the young generation requires to fit itself for a new occupation, 
i. e., an occupation differing from the one usual to the group. 

But the hindrances are not confined to those between 
groups ; even within the group there are barriers in the cost of 
travel ; delays in changing .settlement; reluctance to receive 
strangers ; difference in speech and custom ; the lack of 
sociability, and religious prejudice, etc., etc. 

V. So much for direct competition. But Hermann regards 
indirect competition as often more real and effective than direct. 

This is the labor involved in competing goods. " It shows 

' Staats. Unters., p. 478. 

* Some Leading Principles of Pol. Econ, , p. 66. 



20 GERMAN WAGE THEORIES Vh^^ 

itself in the quantity of foreign products sold, which necessarily 
withdraws from our laborers just so much opportunity for 
labor as the foreign importations would have required on our 
part, had we made the goods." This withdrawal of opportun- 
ity to labor arises as soon as the foreign product can be sold 
somewhat cheaper than that produced with home labor."' If 
the home production is to continue, either wages must be 
lowered, or other changes in the conditions of production must 
be made. Hermann was well aware of the importance of the 
factors of production other than labor. Equal labor with him 
does not always mean equal efficiency. He adduces many ex- 
amples to show that the products of higher paid labor can 
hold the market against products of cheaper paid labor. 
When Hermann wrote, wages were higher in England than in 
Germany, yet cotton and iron were regularly imported inta 
the latter country. The result was that the higher paid 
English labor displaced the cheaper paid German labor. He 
laid down the general proposition that those laborers can com- 
mand the market whose products can on the whole be sold 
cheaper.* It was clear to him that many elements besides 
wages must be taken into account in commanding a market. 
Cost of raw material, access to sources of power, facilities of 
transportation, efficient management and efficient labor are 
all of importance. When all these elements are given proper 
weight, it is clear that it is possible for a country to command 
a market, and at the same time to pay high wages. It is 
equally true, however, that by inattention to conditions of pro- 
duction other than labor conditions, or by relative disadvan- 
tage with reference to these conditions, a body of laborers may 
be entirely defeated in their endeavors to raise wages by limi- 
tation of their numbers through lower birth rate. If the 
limited home supply of labor diminished the home product^ 
there is no guarantee that prices will rise, since foreign com- 
petition may prevent \\.? 

> Staatsw. Unters., p. 483. ' Ibid., p. 483. ' Ibid., p. 483. 



227] HERMANN 3 1 

II 

Hermann's treatment of indirect competition, at first sight, 
seems to lend support to the chief contention of the protec- 
tionist in respect to wages. The free trade doctrine has en- 
joyed no sHght advantage, in that it could quote in its support 
the teachings of nearly all the respectable economists for a cen- 
tury or more. It would be no slight gain if the authority of 
Hermann could truthfully be used in support of protection. 
While some support might be gained from him, it will appear 
from the statement given above that he was free from somie of 
the commonest errors observed in the modern discussions of 
the tariff. It would be hard to find in his discussion support 
for the " pauper argument," unconnected, as it commonly is, 
with rigid investigations as to conditions of production other 
than labor conditions. It is too often assumed that " cheap " 
labor will inevitably displace more highly paid labor. Accord- 
ing to Hermann's view, pauper labor, far from being a danger- 
ous competitor of better paid labor, might easily be displaced 
by the latter. The real importance of indirect competition, 
then, lay in the fact that such competition was made possible 
by various favorable conditions of production. By this means 
capital might be the laborer's most relentless competitor, 
thus rendering useless his efforts to better his condition by 
limiting his numbers. 

The treatment of direct competition is open, of course, to 
the charge of inadequacy, but this is true of all beginnings. It 
is less to Hermann's discredit that he did not complete the 
theory, than it is to his followers, that they ignored the theory 
altogether. The objections which have been urged against 
Cairnes' idea of the limits of competition in group arrangement 
may be urged against Hermann's idea. They may both have 
truly described conditions at the time, but the extension of 
machinery and modern methods of production makes modifi- 
cation necessary. Both writers appear to have had in mind 
principally a sort of contingent, not an actual, competition. It 



22 GERMAN WAGE THEORIES [228 

depended upon the transference of the young from the occu- 
pation of parents to other kinds of work. The theory was in- 
tended to answer the question, What is the force of a man's 
competition if he tries to change his occupation? It did not 
determine actual competition should a man remain in his occu- 
pation.' On Hermann's part the doctrine was negative. This 
is due to the fact that he did not complete the study as we 
may suppose he had planned. 

His idea that wages are high or low according as the labor 
is near to, or remote from, the final stage of production, is new 
and interesting, but does not seem to have large support from 
facts. By comparing wages paid in the earlier stages of pro- 
duction with those in the later, facts could be found which 
would seem to support a directly opposite conclusion. He 
points out no limited special talent as necessary to perform the 
labor near the final stage. He notices no obstacles to com- 
petition in the final group which do not apply to other 
groups. He provides for competition in all the groups from 
the new populations, and it does not appear clear why in a few 
generations migrations from other groups would not reduce 
wages to a general level for like skill. If there were reasons 
in general economic conditions why the highest wages could 
be paid for work on the final stage, and it were actually 
offered, there would be a tendency to overcrowd those occupa- 
tions, a tendency which would result in reducing wages to the 
level of pay in other occupations. 

The most interesting point, and certainly the most import- 
ant for later developments of wage theories in Germany, is 
Hermann's treatment of the wages-fund theory. But this point 
is so intimately connected with the teachings of Hermann's 
successors that a discussion of it will be deferred till the group 
to which Hermann belongs is brought under review. 

•J. B. Clark, Limits of Competition. See Clark and Giddings, Modern 
Distributive Process. 



CHAPTER III 



HERMANN S SUCCESSORS 



There are a number of economists who are the followers 
of Hermann in the sense that they are influenced by his teach-) 
ings, but Brentano is one in the sense that he made additions 
to Hermann's theory. Although Brentano has made several 
contributions to the subject in recent years, nothing more 
fundamental has appeared on his theory of wages since he 
published the essay in Hildebrand's Jahrbiicher, in 1871, on 
" Die Lehre von den Lohnsteigerungen mit besonderer Ruck- 
sicht auf die englischen Wirthschaftslehrer,"^ This is a criti- 
cism of the English views on wages, in the course of which his 
own ideas are made apparent. The central point of his 
criticism is his opposition to the fixity of the fund involved in 
the doctrine of the wages- fund, as taught by the leading 
economic writers up to that time. He exonerates Adam 
Smith from the imputation of having conceived the fund as a 
fixed quantity; for, although he was the first to use the word, 
fund, and to speak of it as a source of wages, when capital and 
land are introduced as claimants of a share in the production, 
wages no longer correspond with total production, and from 
this point on, are not conceived as fixed by the amount of a 
fund. Having placed Adam Smith to one side as not open to 
criticism on this point, Brentano proceeds briefly to show that 
when other economists thought they were basing their doc- 
trine on a fixed fund, they were mistaken. Ricardo's doctrine 
of the relation between wages and profit assumes a fixed 
amount. At the same time his theory of the standard of life 

^ See Jahrbucher fur Nationaloekonomie, i Folge, vol. xvi, pp. 251-281. 
329] 33 



^ . GERMAN WAGE THEORIES [330 

as determining wages makes fixity impossible, depending as a 
standard does upon the laborers' subjective measure of life- 
needs. This charge, however, of a lack of consistency be- 
tween two parts of a theory does not seem to be well founded, 
from the fact that so far as Ricardo considered the standard 
of life as determining wages, it was a minimum standard which 
he had in mind, and this he conceived as constant for long 
periods. Brentano also denies Senior's claim to have estab- 
lished the fixity of the fund upon a scientific basis. According 
to Senior, the wages-fund depends upon the relation in which !■ 
the entire product is distributed between laborers and capital- ij 
ists on the margin of cultivation. This relation depends upon: 
the rate of profit, which in turn depends upon the surplus 
above the cost of labor. In short, the fund which determines 
wages is itself determined by wages. John Stuart Mill is as 
little successful as the others in establishing the fixity of the 
fund. Having placed certain limitations upon the terms em- 
ployed. Mill holds that wages depend upon the relation 
of population and capital. He further states that they cannot 
be affected by anything else. "Wages cannot rise, but by an 
increase of the aggregate funds employed in hiring laborers, or 
by a diminution in the number of competitors for hire; nor 
fall, except either by a diminution of the funds devoted to 
paying labor, or by an increase in the number of laborers to 
be paid."^ He here assumes a certain degree of fixity, but 
Brentano points out that Mill's idea of capital allows very little 
definiteness to the fund, since he made the distinction between 
capital and not-capital to centre wholly in the intention of the 
owner. Human intention as to the particular employment of 
wealth is too changeable to allow fixity to be predicated of its 
object. For instance, the ordinary exigencies of life may re- 
quire that what to-day was intended to be devoted to the em- 
ployment of labor may to-morrow be spent on a journey. An 

^ P/incipUs of Political Economy, Book ii, ch. xi, § I. 



23 1 ] HERMANN'S SUCCESSORS 35 

increased demand for goods might easily change the wages- 
fund by a change in the mind of the capitalist as to the destin- 
ation of wealth in his possession. 

Thornton discussed at considerable length the possibility of 
an increase of wages, either at the cost of consumers by com- 
pelling them to pay higher prices for commodities, or at the 
cost of employers through a diminution of profits. He argued 
that it could be at the cost of consumers only if there arose a 
relative increase of demand for consumable goods, or a relative 
decrease of product by monopoly. Accordmg to Thornton's 
view, in whatever way consumers are forced to bear the bur- 
den of the higher wage in one branch, it will be found that 
their power of demand for other commodities has been propor- 
tionately weakened, and thus laborers in other branches suffer 
a corresponding loss. It is evident that, if we entertain Thorn- 
ton's view, although we may not hold to a fixed wages-fund, 
we really substitute for the latter a fixed income-fund, and 
must admit the truth of the opinion held by the wages-fund 
theorists that one class of laborers can increase their wages 
only at the expense of another class. Brentano holds that 
Thornton has here made a mistake, which consists in not suf- 
ficiently analyzing the changed economic conditions of laborers 
as consumers, brought about by a rise in their wages. By as- 
suming a fixed income, it is true that by so much as income 
is allowed to expand in one direction it must contract in an- 
other. But Brentano continues to argue that by the very con- 
ditions of the supposition, the laborers' mcome is not fixed, but 
increased. Therefor, in their case no contraction is necessary. 
Furthermore, the extra demand upon the incomes of others 
by increase of price is exactly counterbalanced by an increased 
wage or purchasing power on the part of laborers. Hence an 
increase of wages, by the method supposed, is not a detriment 
to otber laborers, nor is it inimical to national accumulation, if 
secured at the expense of employers, for by as much as capi- 
talists have less inducement, laborers have greater power to 
save. 



^6 GERMAN WAGE THEORIES [332 

So far the work of Brentano seems to be purely negative, 
but taken in connection with his position in regard to the 
source of wages, both ultimate and proximate, it is enough to 
show the trend of his thinking. His ideas as to the source of 
wages is made clear in the article in the Jahrbiicher, and in some 
of his later works. ^ The capitalist secures control of laborers' 
products by supporting laborers out of his capital. In what- 
ever form it may come, there is the purpose and expectation 
that the value will all return to the capitalist out of the income 
of the consumers of his product. Since what consumers offer 
is no settled amount, the wages-fund theory overlooked the 
"possibility of rolling off upon consumers the higher wages, 
demanded by coalitions; it overlooks the fact that an employer 
will always be ready to expend more capital in the payment 
of wages as soon as the consumers replace for him the sum 
expended thereon, and that in such a case it will always be 
possible for him, if he himself has no more than a certain capi- 
tal, to procure capital by borrowing abroad."'' 

We see how closely he follows Hermann in admitting the 
entrepreneur's possessions as the immediate source of wages, 
but denying that they perform the important function assigned 
by the wages-fund theorists. The capital of the employer is 
the source of wages in the first instance, but the employer 
himself is only a link in the chain, and that a very dependent 
one ; for consumers control the situation. If the latter show 
willingness to consume at remunerative prices, capital can ex- 
pand to an unlimited amount by anticipation under our credit 
system. This view necessitates the surrender of the idea of a 
fixed wage fund. The effective criticism of that postulate of 
English political economy is the important contribution of 
Brentano to this subject, based as the criticism is upon Her- 
mann's positive contributions. Hermann's criticism consists 
largely in an interpretation of economic organization, as related 

^ See Relatio7i of Labor to Law, p. 214. ^See below, p. 37. 



333] HERMANN'S SUCCESSORS 37 

to the laboring man, which made necessary a different view of 
the nature of the " fund " from that of the English school. 
Brentano was not content with this, but pursued the enemy 
into his own camp. He showed that, as judged by the very 
writings of those who championed the doctrine most strongly, 
it must suffer discredit. 

From his criticism of Ricardo and Mill, as of others, it is 
clear that Brentano does not believe in the fixity of the wages- 
fund. But his account of the manner in which the capital in 
employers' hands, which he regards as the immediate source 
of wages, can be changed in amount, shows that there are 
definite limits to the fluctuation of capital. One common 
method was shown by Brentano in his criticism of Mill. An 
employer might change his mind. But while this might affect 
to some extent the fixity of the funds of an individual capitalist, 
it becomes of less importance when applied to capitalists as a 
class, for an average change of intentions by a large number 
of employers might result in something approaching a con- 
stant. The same remark holds for the other cause — the use 
of credit. If an individual capitalist is in mind, there may be 
some truth in the possibility of increasing wage-paying power 
by credit, but when applied to all capitalists the use of credit 
for such purposes has definite limits. 

In general, we may say that Brentano's criticism of the 
English economists makes clear his view that the source of 
wages is elastic, and that his treatment of Thornton's opinions 
shows that Brentano regarded as possible an advance of wages 
to workers in one branch of industry, without necessity of loss 
to workers in other branches. Yet the whole treatment fails 
clearly to distinguish between the operations of individual 
capitalists and the operations of capitalists as a body. 

Roscher's contribution is rather insignificant. As usual 
with the Germans, he opens the discussion by assigning to 
supply and demand the highest importance. Each element is 
considered by itself in the discussion. The supply of labor is 



28 GERMAN WAGE THEORIES VlZA^ 

determined by the prevailing standard of life. And since the 
standard is determined by laborers, therefore the supply of 
labor is determined by laborers. Thus one important factor 
of those which determine wages is under the control of wage- 
receivers. Roscher seems to have understood the real signifi- 
cance of this fact without assigning too much importance to it. 
It is not true, of course, that present laborers have control of 
present supply. To say that laborers have control of labor- 
supply can only mean that present laborers can control future 
supply. How important this may be as a basis for shifting 
upon laborers the responsibility for their own condition, de- 
pends upon how thoroughly we hold to the solidarity of labor 
as a sort of corporate responsibility by which the present gen- 
eration is held responsible for the doings of the past genera- 
tion. Responsibility is of two kinds, natural and moral. 
Natural responsibility for past errors, either of themselves or 
of their ancestors, laborers cannot escape. The sins of the 
fathers are visited upon the children. But the moral respon- 
sibility for the errors of a former time cannot be ascribed to 
the present. But the case may be different in respect to the 
accountability of the present for the future. It is certain that, 
physically speaking, the supply of the laboring population 
twenty years hence will depend upon the action of population 
for the next ten years. But there is nothing in the nature of 
things that could indicate what laboring population is neces- 
sary twenty years hence. So that present increase is based 
upon present conditions, and the future must take care of 
itself; just as past conditions determined past increase, and the 
present must deal as best it can with numbers such as they 
are. Although Roscher does not enter at all upon this line of 
reasoning, he sees enough to admit that labor's control over 
its own supply has this limitation : that the laboring class as a 
body can benefit by it only after long periods of time, and that 
for the moment the control is of slight advantage, because the 
whole present supply must be carried to market for support. 



235] HERMANN'S SUCCESSORS ^p 

Demand, according to Roscher, depends upon the value in 
use of labor and purchasers' capacity to pay. While the 
standard of life fixes minimum wages, value in use determines 
maximum wages. Under value in use he merely approves v. 
Thiinen's point that additional product in any branch of in- 
dustry, due to the labor of the last workman employed, has a 
controlling influence on the rate of wages. He connects 
capacity to pay in a vague way with national income. In this 
it is easy to trace the influence of Hermann. But the points, 
when not fragmentary, are confused. Hermann is also fol- 
lowed in the opinion that the capital of the employer is not the 
source of wages, but acts as a sort of reservoir for the payment 
of wages. Demand for labor does not depend upon the size of 
the national capital. This view is supported by calling attention 
to the effect of the different uses of capital upon the demand for 
labor. " Every transformation of circulating into fixed capital 
diminishes the demand for other labor." " Only that part of 
circulating capital can aflect "wages which is intended, directly 
or indirectly, for the purchase of labor." ^ He likewise follows 
Hermann in the view that the highest wages are paid to those 
who are employed on the last stages of the productive processes. 

This is enough to show how little of originality is to be found 
in this part of Roscher's work. At the same time it is enough 
to indicate his proper historical place on the question of wages. 
The method is that of Rau and Hermann, while the ideas are 
m,ostly those of the latter. While the treatment is much 
weaker than that of the one from whom he chiefly draws his 
material, the inclusion of von Thiinen's undeveloped doctrine 
of the influence of marginal laborers on M'ages, having no 
organic connection with other parts of Roscher's work, 
implies, in addition, a careless attitude of mind on the whole 
question. 

Mithoff"'' seems to have adopted Roscher's treatment as an 
^ Roscher, Fol. Econ., v, 2, p. 55. 
' See Schonberg's Handbuch der Politischen Oekonomie. 



40 GERMAN WAGE THEORIES \lZ'^ 

outline for his own discussion. The standard of life, the ele- 
ments of which he states in detail, here also determines mini- 
mum wages and is treated under supply, while the usefulness 
of labor and money demand (Zahlungsfahigkeit) determine 
maximum wages. The larger part of his treatment comes 
under ability to pay, and is hence an attempt to give a more 
precise determination to the wages-fund. It must be confessed 
that the exposition is somewhat hackneyed. The capital of 
the employer and that of others over which he has control by 
means of credit is a reservoir for the payment of wages. What 
flows out of the reservoir in the form of wages is restored by 
consumers of the goods produced by labor's help. Hence 
consumers are the buyers of labor, and their income, or that 
portion which is paid to labor, is the true source of wages. 
This is, however, not a fixed amount in the sense that it re- 
mains fixed during a productive period as it was at the begin- 
ning. At any moment it is a fixed, but not a foreordained 
amount. If at any moment we divide this amount by the 
number of laborers, the quotient is the average wage. How- 
ever, Mithoff shows his practical turn of mind and his agree- 
ment with Brentano by asking what purpose such a procedure 
would answer. The amount of capital, however, applied to 
the purchase of labor is unknown. If it is a certain sum to-day, 
by a change of rate it is a different sum to-morrow. A change 
of rate is possible by a transference of part of the profits to 
wages, or by drawing more heavily upon consumers. " If 
neither of these assumptions can be made, then the under- 
takers will not apply a greater amount of capital to the pur- 
chase of labor. In this case, certainly, the average rate of 
wages remains dependent upon the capital which the under- 
takers determine shall be applied to the purchase of labor." 
However, the amount is not made unchangeable during the 
production period. How much of the national income is ap- 
plied to payment of wages depends upon two factors : the first is 
direction of consumption; the second is the character of produc- 



337] HERMANN'S SUCCESSORS ^j 

tive industries. " If consumption seeks preponderatingly for 
such goods as require for their production much human labor,. 
a greater part of the national income is required for the pur- 
chase of labor than would be required if such goods were con- 
sumed which required less labor and more capital and a 
larger draught upon nature's powers." If we suppose an in- 
crease of total capital the evolution of technical branches of 
production will promote a more universal application of capital 
and a diminished use of human labor. 

We perceive that Mithoff' s views are for the most part such 
as we find in the works of his predecessors. We have supply 
and demand as the great law, supply as connected with cost of 
labor, demand for labor as connected with its utility, and 
lastly consumers' income as the true source of wages, which is 
but a repetition of Hermann's view. How much consumers 
contribute to wages depends, he says, upon the direction of 
consumption and the character of productive industries. If 
consumption takes the direction of demanding goods chiefly 
made by labor, wages tend upward ; or, if the state of the arts 
is such that what is demanded is made largely by machinery^ 
human labor is displaced and wages tend downward. The 
comments of Professor Taussig^ on this point are so admirable 
that I shall be pardoned for quoting him. After pointing out 
that this reasoning as to the direction of consumption is 
derived apparently from Roscher, who states that the demand 
for unskilled labor is much affected by the direction which con- 
sumption takes, being greater if the luxury oi the rich takes the 
form of hiring many dependents, and less if expenditure 
takes modern form, he continues: * * * " The whole consid- 
eration of the direction of consumption as affecting wages, the 
discussion of demand for hand-made goods or machine-made 
goods * * all goes back to consumers' demand or income as 
the source of wages. It can really bear, therefore, only on the 

^ Quarterly Journal of Economics, v. 9, p. 19. 



42 GERMAiV WAGE THEORIES [^38 

demand for one sort of labor as compared with another. * * * 
The form which it takes with Mithoff, and apparently with 
Roscher, overlooks the simple fact that machines are made 
by labor, and that a demand for machine-made goods affects, 
not the total demand for labor, but the direction of demand 
(say) towards laborers who make and tend shoe machinery 
rather than towards old-fashioned cobblers." 

There is a good deal in Mangoldt to remind one of Senior, 
both in spirit and in treatment of the subject. Senior, how- 
ever, did not employ such terminology as to obscure rather 
than illuminate his text, nor did he cumber the treatment with 
such barren analysis. Mangoldt's teachings agree for the 
most part with contemporary English political economy. 
This is seen most clearly, perhaps, in his treatment of the 
wages-fund. The supply of the means of support of labor is 
said to constitute the demand for labor. This supply makes 
up the greater part of circulating capital. For theoretical 
purposes, says Mangoldt, we may treat circulating capital and 
means of support of labor as identical, and say that wages are 
determined by the relation of circulating capital to labor 
supply. But this comes dangerously near saying that wages 
are determined by the relation of labor supply to wages. This 
declaration so lacks in scientific precision that it may not be 
improper for Professor Taussig to say that Mangoldt " gives 
the subject a wide berth." His fragmentary treatment may 
be exemplified by the fact that, like Roscher, he merely ap- 
proves one of von Thunen's most important points, but makes 
no use of it in further discussion. He says the demand for 
labor proceeds from employers, and can continue only so long 
as the service of labor surpasses in value that which the em- 
ployer pays in the form of wages. Since employers apply 
labor to the most productive parts of their business, and 
only have recourse to less productive parts as more labor 
is employed, it is possible to say that the wages which 
secures equilibrium between supply and demand is of like im- 



3^9] HERMANN'S SUCCESSORS 43 

portance with the anticipated pure return of the labor last 
applied.' 

The treatment of our subject by Philippovich^ is of interest 
'•■because he endeavors to give a systematic account of Political 
Economy as it now stands. He does not represent any 
economic school, but tries to retain the best from all writers, 
and thus exhibit a progressive science. His method is thor- 
oughly German, following as he does Rau and Hermann in 
treating wages as only a part subject, under price of commodi- 
ties. If faithfully followed, this method insures the inclusion 
rin the discussion of all the important commercial influences 
upon wages. To avoid error, however, it is necessary to notice 
in what respects labor differs from commodities. Philippovich 
•escapes this error only in part. He merely mentions the 
laborer's relations to the thing which the laborer sells. Since 
the laborer cannot separate himself from his labor-power, and 
the fulfilling of the labor contract involves the use of the man, 
"the wage- question involves more or less the physical, moral, 
^spiritual and social welfare of wage-earners. These non- 
material elements of the problem affect the practical working 
out of the forces of supply and demand. In critical periods 
of the relation of employers and employed, the local bonds of 
-workmen preventing movement, as well as lack of accumulated 
means of support, operate against them. The ease with which 
^employers organize, and their command of the supplies of life, 
give them the advantage in the struggle, and as a conse- 
■<juence laborers are apt to suffer in their rate of wages. 

These are obvious considerations, and were well expressed 
long ago by Adam Smith. The peculiar bearing which they 
ought to have upon the method employed by nearly all the 
economists of the group now under consideration, will be 
latioticed when we have finished the exposition of Philippovich's 

1 Grundriss der Volkwirthschaftslehre, p. 158. 
* Grundriss der Politischen Oekonomie. 



^ GERMAN WAGE THEORIES [34Q 

views. Philippovich follows Hermann in the manner in which 
he examines the forces of supply and demand. On the side of 
demand we have (i) the number of undertakers; (2) the 
amount of service desired by them ; (3) their valuation of the 
service ; (4) their ability to pay. On the side of supply we 
have (5) the number of those desiring work; (6) amount of 
service demanded of workers ; (7) laborers' own valuation of 
labor power ; (8) value of money paid for labor, 

I. The influence of the number of employers, says our 
author, lies in competition. The more employers there are, 
the more will wages have a tendency to rise. From this 
point of view it would seem that laborers' interests are 
inimical to the concentration of industry. If this be true,, 
laborers have a discouraging prospect ahead. But our author 
does not hint that laborers have any control in the matter. 
Whether a country shall have a large or small number of 
employers depends upon many conditions, he says, among 
which are the degree of culture, distribution of wealth, the or- 
ganization of credit, and the manifoldness of the directions of 
production. None of these is under the control of laborers. 

II. The amount of labor which is sought for in the general 
labor market is determined by the amount of land and capital 
which the owners employ in productive industry. The 
strength of this labor demand is much affected by the distribu- 
tion of wealth and the productivity of wealth. Individuals 
who own large amounts of wealth apply a larger proportion to 
direct satisfactions than those who have small possessions, 
since the latter are more strongly moved to the increase of 
income. Concentration of wealth, then, in the hands of single 
individuals is a hindrance to the demand for labor. If wealth 
has become less productive, there may be increased activity in 
productive enterprises, since decrease of income leads many 
individuals and families to increased effort to bring incomes up 
to a former standard. Since the opposite is likewise true in 
the case of other individuals and families, the demand for labor 
is affected by fluctuations of income from investment. 



^4l] HERMANN'S SUCCESSORS 45 

III. Labor is valued by undertakers, not in itself, but in its 
products. The price of products, however, gives us slight 
indications of what wages are or can be, since price must cover 
all costs of production, of which wages may be but a small 
part. The highest amount which can be paid will be much 
•affected by the price of products in connection with the extent 
of the market, the technical skill of workmen, and the relation 
of efficiency to wages. Philippovich lays emphasis upon 
laborers' responsibility. Under normal circumstances, the 
most important element operating in the laborers' favor is the 
personal element. It is only by greater skill, greater industry, 
and greater care that their condition is elevated. 

IV. Under "Ability to pay," little is said by this author. 
While accepting Hermann's view that undertakers stand be- 
tween laborers and consumers of laborers' products, and that 
their ability to pay is affected by what cohsumers pay, he yet 
points out that undertakers may replenish their fund of dispos- 
able wage capital by means of credit. But how this fact may 
affect wages is not made clear. This is a point which has 
been mentioned by both Brentano and Philippovich, but has 
been left undeveloped by both. 

V. To understand adequately how laborers compete with 
each other we must perceive that industry is carried on in 
"branches and laborers are divided into groups, separated more 
or less completely by differences in skill, special aptitude and 
training. However, there are in all branches of industry oc- 
cupations which require only ordinary skill or intelligence and 
hence can be filled by the common laborers of all branches. 
Here exists almost complete competition and the lowest wages 
prevail. As we ascend in the scale of skilled and special em- 
ployments up to the liberal professions, we find more and 
more important the group formations. Even in groups there 
are forces at work which tend to break down the barriers to 
competition. One such force is the existence in modern times of 
-extended enforced idleness. Such idleness, not accidental but 



^6 GERMAN WAGE THEORIES Vh^'^ 

largely the result of the unsteadiness of industrial evolution, im- 
pels men to seek new employments, thus breaking down former- 
group arrangements. There is always a readjustment of employ- 
ment after an extended period of enforced idleness. Under cer- 
tain exceptional conditions there are natural lin^itations to con)- 
petition. When unoccupied land is plentiful competition will 
cease at the point where wages sink to the level of what labor 
can make on such land. But this is not the law under ordi- 
nary circumstances. The openings to labor without capital 
are small in number. As a rule labor power without capital 
has no value to its owner. 

VI. By the amount of labor offering service our author does 
not mean the number of persons seeking work. That is 
measured by the labor power and skill of laborers and the 
number of hours during which daily its labor power can be 
active. The only point made under this head beyond the fore- 
going definition is that relating to the correspondence between 
time and service. Up to a certain point as the hours of the 
working day are shortened the quality of the service per hour 
increases. No attempt is made to determine this point, but it 
is brought out that if this point of maximum service is passed 
in the direction of shorter hours, the effect is the same as if the 
number of workers were decreased. 

VII. The laborer's valuation of his labor power may be 
affected by two circumstances. Under the exceptional con- 
ditions of the existence of large quantities of fertile unoccupied 
land accessible to laborers, wages cannot sink below the in- 
come obtainable by the laborer in independent undertaking. 
But under ordinary conditions the opportunities for independ- 
ent undertaking without large capital are insignificant, so that 
from this standpoint labor power has no value to the owner. 
A basis for its valuation is found by recognizing the personality 
of the laborer. This appears by reason of the cost value of 
labor and the standard of life. The cost of labor is not so 
simple as might at first appear. Even a narrow view must 



243] HERMANN'S SUCCESSORS 47 

include in addition to support during the time of work, costs 
of bringing up and development of the laborer, support during 
the period of old age, and a reserve as a provision against 
sickness and other causes of loss of employment. But the 
laborer as a human personality is more than an individual. 
He is also the father of a family ; and no fair judgment of the 
value of labor can ignore that fact. That it is so often ignored 
is accounted for by our author by a reference to the strong 
competition of labor, and the admittance of women to men's 
employments. The question of costs is much influenced, 
whether as an individual or the head of a family, by the 
standard of life, which is defined as the expense which one is 
induced on the average to incur for the satisfaction of wants, 
in accordance with the habit and custom of the group to which 
one is attached by his calling ; or shortly, support conformable 
to one's rank. This differs so much according to peoples, 
times, and places, that it is impossible to reduce the standard 
of life to any law. In general it may be said that much 
depends upon the position accorded to the laboring class in 
society and political life. The different amount of contact with 
other social strata and the means of culture become of prime 
importance. Of course, the standard of life is a powerful 
force among all classes of society ; but that of the laboring 
class has a special interest to students of society, because the 
integrity of the standard has a more or less precarious support 
in their case, and a failure to maintain it may mean a real 
degradation. It is because laborers are affected in their social 
position and their respectability that such fierce opposition is 
made to wage reductions. It is only by raising the standard 
of life that we can have a permanent rise of wages. 

VIII. Wages may be said to be affected by money in that 
wages fall if money increases in value, and vice versa. The 
cause is a double one. If money becomes dearer, other things, 
including labor, become cheaper ; but in the face of a falling 
market, production tends to diminish, and thus the demand for 



.g GERMAN WAGE THEORIES \.ZA\ 

•labor is lessened. It will be noticed that this argument for the 
most part applies to money wages only, and, indeed, the treat- 
ment thus far contemplates no determination of commodity 
wages. 

The entire treatment by Philippovich may be summarized as 
follows : Wages are determined by the combined action of the 
following forces: i. The competition for labor is greater, the 
larger the number of employers. 2. The demand for labor 
depends partly upon the amount of land and capital which 
the owners employ in productive industry. This employment 
is favored by small owners. 3. Labor is largely valued accord- 
ing to the efficiency and skill of workmen. 4. The power to 
employ labor is affected by the degree in which undertakers 
can restore capital either from consumers' incomes or by the 
use of credit. 5. Laborers are limited in their competition 
against each other by social and industrial group arrange- 
ments. 6. The labor supply is influenced by the length of the 
working day. 7. Wages, in many instances, are largely de- 
termined by what laborers can make in independent undertak- 
ings, although ordinarily there are no lucrative independent 
undertakings open to them. 8. The standard of life is an ever 
active powerful force affecting the supply of labor. 

These will be recognized as important elements, but the 
analysis would be much more complete if some attempt were 
made to measure the relative importance of the factors. Under 
given circumstances, some factors are peculiarly active, while 
others are quiescent. If we are not to be confused by a mass 
of meaningless details, we must know these facts. 

There are still two points under dispute which Philippovich 
discusses briefly. They pertain to the effects of a supposed 
rise of wages. 

I. May wages rise at the cost of the undertakers ? To 
answer this question intelligently we must analyze the under- 
taker's income. It is in the aggregate composed of (i) wages 
of superintendence, (2) interest, (3) profit. A rise of wages at 



345] HERMANN'S SUCCESSORS 49 

his cost would affect him, therefore, either as leader, capitalist, 
or speculator. We may assume that his first two functions 
cannot be affected by this cause except through the last. If a 
rise should occur at the cost of profits, the undertaker would 
be in a more unfavorable position than the ordinary capitalist, 
for the latter includes in the rate of interest insurance against 
risk. Such a position he would not endure permanently, and 
the only reason he might temporarily would be the inability 
to withdraw his capital. Moreover, no one would embark in 
industries in which such conditions prevailed, so that in course 
of time production would decline, and with a rise in price 
profits would become normal. 

There are certain kinds of industries in which wages might 
rise with no unfavorable effect upon profits. Such are certain 
forms of monopoly, or industries for whose products there is 
a rising market, or those in which the costs of production de- 
crease more rapidly than wages increase. In such cases the 
advantages could be appropriated by labor only through com- 
bination. Labor unions, as instruments to keep wages from 
falling, are beneficial under certain circumstances, both in 
competitive and monopolized undertakings. In the first, to 
prevent undertakers from lowering wages under the stress of 
competitive pressure among themselves ; in the second, where 
there is no pressure of competition, to force those to allow 
better conditions who can but will not voluntarily do so. 

II. It has sometimes been said that if wages should rise at 
the cost of consumers, laborers would be sufferers in the end. 
The argument is that by so much as prices rise, consumers, 
having fixed incomes, must curtail their consumption. This 
means a weakened purchasing power in certain directions, 
resulting in a decrease of production and a falling off in the 
demand for labor power. But this is a point to which Brentano 
paid special attention, and Philippovich, without mentioning 
his authority, employs Brentano's argument. It is simply that 
any loss of former consumers' purchasing power is fully made 



^O GERMAN WAGE THEORIES [346 

up by the new additional purchasing power of laborers whose 
wages have been increased. Philippovich, however, did not 
fail to notice that, if prices were increased by a rise of wages, 
laborers would lose a part of their wage advance by having to 
pay higher prices for consumption goods. He at the same 
time pointed out that they would not lose all their advance, 
since a part of the burden of higher prices would be borne by 
capitalists, land-owners and professional men. 

The discussion of these two questions becomes clearer by 
noticing the views of Thornton, whom both Brentano and 
Philippovich are either following or criticising. Brentano 
would naturally consider Thornton, for his article in Hilde- 
brand's Jahrbiicher was devoted to a study of the doctrine of 
wage increase. Philippovich took up the discussion doubtless 
because he felt that no systematic work on Political Economy 
would be complete without it, although he had nothing espe- 
cially new upon the subject. 

Thornton^ desired to determine whether trades unions could 
be instrumental in securing for laborers a permanent advance 
in wages above what would be secured without union action. 
He was met at the beginning of the discussion by the objection 
that whatever the unions might succeed in extorting would 
either have been granted eventually without union action or 
could not be lasting, according to circumstances. 

The first objection was supported by the contention that if 
labor organizations should force a wage advance in some par- 
ticular trade, at a time when business was improving and profits 
abnormally advancing in that same trade, it would be but to an- 
ticipate what must occur later by forces purely economic when 
capital should be attracted to that trade by reason of the extra- 
ordinary profits prevailing. The advent of new capital would 
cause an increase of demand for labor, and wages must rise in 
consequence. Thornton admitted the force of this argument, 

1 On Labour, p. 279-321. 



347] HERMANN'S SUCCESSORS 1 1 

but claimed that unless the unions intervened at the beginning 
of the process the employers would pocket the whole advant-' 
age during the time preceding the advent of competition.- 
Furthermore, if laborers waited for competition to raise their' 
wages they would suffer loss, for increased production follow-- 
ing competition in production would lower prices, and thus^ 
the source of higher wages would be partially cut off. This^- 
point Philippovich also notes. So much for the efficiency of 
union action in case profits are above the general level. 

The second objection that higher wages, extorted at a tmief 
when profits were at an equilibrium or were below the general 
level, could not be permanent, Thornton denied for the greater 
number of cases to which the rule was applicable. Unionism 
can raise wages permanently in the following cases: (i) Those 
in which there exists monopoly, for prices can be raised 
against consumers to meet the increased cost. (2) Those in 
which, whether monopolized or not, the demand of customers 
.,_^ is increasing. Prices may be raised. (3) Those in which 
economizing machinery and processes are being introduced, 
^*^y these means laborers are more efficient and a greater num- 
ber of products at old prices is as beneficial to employers as 
the same number at higher prices. (4) A rise of wages is 
also possible if all trades were united in a combination so that 
an equal and simultaneous rise of wages would produce a uni- 
versal fall of profits. In this case, capital having no place to 
which to flee for relief, must submit. There are other cases 
mentioned, but these are the more important. In all the cases 
mentioned above, except the third, higher wages are obtained 
only at the expense of undertakers or consumers. Indeed,. 
Thornton lays it down as a general proposition that wages 
cannot rise except as prices rise or profits fall. Hence it be- 
comes important to enquire : in all cases in which unionists 
are the gainers, who are the losers? This is, of course, a 
difficult problem, since all are consumers. 

We shall indicate briefly Thornton's answer, as it is to his- 



52 GERMAN WAGE THEORIES [348 

answer that the German economists take exception. He says 
that this will depend upon many circumstances, the important 
ones being, whether the gain has taken place in a competitive 
or in a monopolized trade, or whether it has taken place during a 
stationary or a progressive period. We will simply notice here 
the case of monopolized industries. If the rise occurs in such 
an industry in a prosperous period, employers are not injured, 
for they can raise the price. Consumers are the only positive 
losers ; for, although they may be compelled to pay more for 
one class of commodities than formerly, they may still be able 
to spend as much as before on the produce of other trades. In 
that case laborers in general would not be deprived of anything 
they were accustomed to ; " they would merely be excluded 
from participating in unaccustomed gains of which otherwise 
they would have had their share." 

If a rise in wages is forced in monopolized industries during 
a period of stagnation, consumers are not the only losers. 
The main body of laborers, excluding those laborers the rise 
of whose wages is contemplated, are injured by the fact that 
the unionists have intercepted an amount of money which 
would otherwise have been expended in the purchase of com- 
modities which the main body of laborers produces. In a 
stagnant period, incomes are regarded by Thornton as fixed ; 
therefore, if the producers of one class of goods succeed in 
absorbing more than the former usual share of consumers' 
income, less remains for expenditure in other departments of 
trade. The curtailment of expenditure in these other direc- 
tions diminishes demand for goods in these trades, and thus 
laborers employed in these trades are injured. Thus Thornton 
regarded the gain to a particular group of laborers under the 
circumstances noted above as offset by a double detriment ; 
first to consumers, whose consumption was thereby curtailed, 
and secondly to the general body of laborers, the demand for 
whose products was thereby diminished. 

This is the point to which both Brentano and Philippovich 



349] HERMANN'S SUCCESSORS 53 

object. As already noticed, they call attention to the increased 
purchasing power of the group of laborers whose wages by 
supposition have been increased. They would admit that con- 
sumers of the products whose price has been raised are suf- 
ferers, but they deny that the general body of laborers are 
necessarily affected. The aggregate demand for goods has 
not decreased because one class of consumers has benefited at 
the expense of another class. Laborers whose wages have 
been increased are more extensive consumers than formerly. 
They now possess an augmented purchasing power just equal 
to the diminished purchasing power of consumers affected by 
higher prices. The conclusion then is that when wages have 
been increased at the expense of consumers, the consumers 
are the chief sufferers, and that the general body of laborers 
are not affected by a diminution of demand for commodities. 
This view would doubtless have been admitted by Thcrt-nton 
if his attention had been called to it, for on its face there does 
not appear any reason why the general labor market need 
suffer because purchasing power has been transferred from one 
class of laborers to another. 

If Philippovich corrected one of Thornton's errors, he did not 
avoid falling into another one of the same author. They both 
teach that in case of monopoly a rise of wages may occur at 
the expense of consumers. Both assume that monopolies 
have such control of the market that they can raise prices to 
meet extra expenses; thus there can be shifted upon con- 
sumers the burden of a higher wage cost. But if monopolists 
can increase prices to their advantage after a rise of wages, the 
question forces itself upon us as to why they could not do it 
before the event. Since precise studies have been made of the 
relation between the price of monopolised goods and monopoly 
profits, it seems clear that monopolists possess no power to 
shift upon consumers the burden of a higher wage rate. 
Monopolists always charge the highest price consumers are 
willing to pay. The principle of charge from the monopolist 



C4 GERMAN WAGE THEORIES [350 

standpoint is the establishment of such a balance between 
-costs and gross income as shall yield the highest net return. 
In general, the number of consumers of a particular good 
varies inversely as the price. An increase of wages constitutes 
an expense chargeable to an undertaking as an undivided 
whole, and is not one which varies with the amount of the 
commodity produced. Such a charge must be borne by the 
monopolist, for if he attempted to escape it by raising prices, 
consumption would be diminished so that the monopolist's 
net income would be decreased. 



CHAPTER IV 



CRITICISM 



It is proposed now to discuss briefly two points pertaining 
to the work of this entire group, the centre of which is Her- 
mann. The first point concerns the method of approaching 
the wages question by all the German economists from Rau to 
Philippovich. The characteristic method is to state that 
wages depend upon the law of supply and demand. In the 
same manner that that law determines the price of commodities, 
so with a few corrections it determines the price of labor. 
The reader of the German work on wages is referred to the 
analysis of supply and demand as applied to commodities, and 
then finds the author employing the same terminology, with 
here and there a word changed designed to suit the special 
case in hand. 

The criticism of this method as applied by the group under 
consideration is that not sufficient emphasis is laid upon the 
very peculiar nature of labor as a commodity. This peculiar 
characteristic is illustrated by the application of the law of 
supply and demand to different kinds of exchangeable values, 
and by the analogy that may be drawn between labor power 
and certain kinds of goods. 

If we undertake to rely upon the operation of demand and 
supply as a practical rule to regulate prices in all industries 
and for all services, we shall find that the rule does not apply 
with equal facility. The law of supply and demand as a regu- 
lator of price can be applied with the least advantage with 
regard to goods or utilities which are produced by a body of 
capital that can be easily, and with small loss by the change, 
351] 55 



c6 GERMAN WAGE THEORIES [352 

increased or diminished. Such would be the case with capital 
invested in the stock exchange or in banking. Supply and 
demand have somewhat less application in a merchant's busi- 
ness, still less in manufacturing, and least of all in transporta- 
tion, especially railroad transportation.' Banking, trading, 
manufacturing, and railroad transportation constitute a series 
of undertakings, at one end of which, banking, the principles of 
supply and demand in regulating price from the standpoint of 
costs, apply with the most satisfactory results; and at the 
other end these principles have less validity. In the bank- 
ing business, nearly all the capital is circulating capital, but 
in the railroad business a larger proportion is fixed, and these 
opposed conditions make a great difference in the practical 
working out of prices. In the banking business, under free 
competition, if the price goes much above the costs of produc- 
tion, the unusual profits attract capital into the business till an 
equilibrium is established. If prices fall below costs of pro- 
duction, further production ceases till the equilibrium is again 
restored, and thus prices hover close to costs. Of the whole 
capital invested, the greater the proportion that is fixed, the more 
difficult it is to adjust investment to change of price. When it 
comes to a business like the railroad business, the costs of pro- 
duction or the cost of service have but slight influence upon 
charges. If competition forces prices below costs, there is no 
economic force to restore it, except such as work through 
long periods. In a merchant's business, sales below cost 
cause a greater loss the greater the amount of sales. But in 
the railroad traffic, any business that pays more than immedi- 
ate expenses is worth more than no business. When a mer- 
chant becomes bankrupt he ceases to compete. But a bankrupt 
railroad is a more dangerous competitor than a sound road. 
In a merchant's business the law of supply and demand may 
be relied upon to adjust prices for the best good of the com- 

1 Hadley, Railroad Transportation, p. 40. 



353] CRITICISM 57 

munity. But in the railroad business combination and agree- 
ment seem the only means to avoid industrial warfare. 

Now the question occurs, is labor power, as a commodity, 
analogous to bank service or merchants' goods, or is it more 
analogous to factory products and railroad service? This is 
important, because upon the answer will depend the extent to 
which we can wisely and without great modification employ 
the same analysis of supply and demand that might be em- 
ployed in reference to competitive goods. The laborer, for the 
purpose contemplated, now occupies the same position in rela- 
tion to his labor power that the business man or capitalist does 
to the commodity or utility he produces. The laborer's capital 
is himself. As the business man maintains his capital only by 
producing and selling the utility his capital is fitted to pro- 
duce, so the laborer is maintained by exercising and selling 
his labor power. The kinds of business referred to above as 
a series differ in two respects. First, in the ability to cease 
■producing without serious detriment to the investment. 
Secondly, in the freedom and ease of transferring the value of 
the investment. In these two particulars banking is at one 
extreme of the series and the railroad business at the other. A 
banker may cease discounting without serious injury to the 
plant, and may easily close up business entirely, transferring 
the value of the capital to another business. A railroad cannot 
cease transporting without serious losses in fixed charges and 
in deterioration. It is comparatively useless as a body of mere 
property. Nearly all the value is in the busmess, so that it is 
next to impossible to decrease the supply of transportation 
according to the demand for it at old prices. The supply is 
kept up at such prices as will secure business. With reference 
to these last points labor is more analogous to the railroad 
business than to banking.^ A laborer cannot cease selling his 
product without serious, and it may be permanent, detriment to 

^Hadley, Railroad Transportation, p. 78. 



j-g GERMAN WAGE THEORIES [^54 

his investment, that is himself. And here the laborer's position 
is peculiar, in that he carries upon his shoulders, so to speak, the 
future supply of labor. If his labor should cease, not only is 
his own investment damaged, but that of others who are de- 
pendent upon him. It is as if a business were being conducted 
not alone for the sake of the owner, but also as a support for 
the business of others, so that if the one ceases the others of 
necessity fall also. 

Neither is the laborer free to withdraw his capital and pro- 
duce something else. The laborer never has anything to sell 
except labor power. If capital does not wish to buy what he 
offers for sale, there is no hope for it. Capital buys at some 
price or the laborer goes to the poor-house. These two con- 
siderations make it as impossible for labor to cease selling its 
product, as for a railroad to cease running its trains. 

This analysis discloses the peculiar nature of labor-power 
as a commodity. Its immobility is a serious obstacle to the 
reduction of wages to a common level. Its comparatively 
permanent supply, together with its necessary productive 
activity, retards the correcting power of supply and demand. 
We may say that the operation of the law of supply and de- 
mand in its application to labor is greatly impeded by friction. 
And in any practical treatment of the wages question such as 
is found in the German literature, the friction-element ought 
to dominate the discussion more than it does. 

None of the authors of this group take pains to point out 
these characteristic differences between labor and competitive 
commodities except Philippovich. But the differences dis- 
cussed by him have slight effect upon his subsequent treat- 
ment. Rau designated an upper and lower limit of price, and 
appealed to supply and demand as forces operating to deter- 
mine wages at some definite figure between those limits. But 
the result is vague and indefinite. Hermann employed the 
familiar procedure, but omitted a discussion of that part of the 
\ question which, according to his method, would have given 



355] CRITICISM 59 

him an opportunity to point out the comparatively permanent 
character of the supply of labor. Having, however, placed 
wages in the same category as the prices of commodities, he 
practically sets aside all factors as having no force except con- 
sumers' income. Although his followers, for the most part, 
enter upon the discussion of wages by an elaboration of factors 
identical with those applied to determine the prices of commo- 
dities, they ultimately appeal to some one as really final. 
When this is not done, as in the case of Philippovich, the 
whole treatment is confused. All recent writers practically 
adopt Hermann's view. It is desirable, therefore, to enter 
upon some discussion of consumers' income as the source and 
determinant of general wages, and this is the second point in 
the criticism. 

It will be recalled that Adam Smith pointed out that there 
was necessarily a minimum rate, below which it seemed im- 
possible that even the lowest grade of labor could subsist for 
any considerable period of time. This lowest rate for any 
family must be more than sufficient to support the man and 
wife. When it went below this, it failed to be consistent with 
the needs of common humanity, and had the effect of produc- 
ing a dearth of workmen. However, the possibility of raising 
wages above the minimum depended upon the increase of the 
" funds " which are " destined for the payment of wages." These 
funds were of two kinds : first, the revenue which is over and 
above what is necessary for the maintenance of the employer, 
and secondly, capital which is over and above what is necessary 
in order that the employer may conduct his business on any 
given scale. In the first part of the section on wages, he 
showed that wages were the result of a contract entered into 
by laborers and employers. In settling the terms of the con- 
tract, the employers have the advantage. In the long run, 
laborers may be as necessary to employers as employers are to 
laborers, but, practically speaking, it cannot be a question of 
" long run " with workmen. Employers could subsist for a 



6o GERMAN WAGE THEORIES [355 

long time on present accumulations. " Many workmen could 
not subsist a week, few could subsist a month, and scarce any 
a year, without employment." ' Notwithstanding the fact, 
however, that employers have the advantage, wages for the 
most part are above the minimum, and this fact is not to be 
regretted ; for good wages, by increasing the efficiency of work- 
men, redound to the distinct advantage of society. Some 
modification of this last proposition is necessary, since there 
are two kinds of laborers corresponding to the two kinds of 
funds for the payment of wages : (i) Laborers who are paid 
from stock are such as by their exertions add to the wealth of 
society. They are " productive." (2) Laborers who are paid 
from revenue and render services simply. They minister to 
personal enjoyment, but their product perishes with the first 
use, and there is added nothing to social wealth. Such labor 
is " unproductive." Adam Smith makes it clear that produc- 
tive processes extend over periods of time, and that wages are 
advanced to laborers by the owners of wealth as the result of 
a bargain. But the exact nature of the funds held by employ- 
ers is not made lucid.* Thus there are two theories of wages 
in the Wealth of Nations. One is the minimum wage theory* 
the other is the theory of demand and supply, the latter con- 
nected with the idea of funds for the payment of wages. 

Ricardo's treatment differed somewhat from Adam Smith's. 
The minimum wage is with Ricardo the natural price of labor, 
a reward which is " necessary to enable the laborers, one with 
another, to subsist, and to perpetuate their race, without either 
increase or diminution." Any deviation from this rate, by the 
operation of supply and demand is called a " market " rate. 
The laborers are in a flourishing and happy condition if the 
market rate is above the natural rate, and in a " most wretched " 
condition if it is below the natural rate. This statement is 

^ Rogers' 2d ed., v. I, p. 70. 

* Taussig, Wages and Capital, p. 150. 



357] CRITICISM 6 1 

much qualified by Ricardo later, either in statement or in 
emphasis, as follows : 

1. The " natural " rate is not to be understood as absolutely 
fixed. The habits and customs of the people make a difference 
between different nations, and between different periods of the 
same nation. 

2. Notwithstanding the statement of the importance of the 
standard of life, it is practically ignored in the subsequent dis- 
cussions on taxation, and the general problems of distribution. 

3. Market wages seem to have small interest to Ricardo, 
probably because natural wages furnished the key to distribu- 
tion. 

Revenue nowhere appears as playing a part in the demand 
for labor. He took into consideration only those laborers who 
are hired by capitalists with a view to realize on the invest- 
ment, and so far as market wages are considered, he regards 
them as determined by the relation of capital and population. 
In his essay " On the Influence of the Low Price of Corn on the 
Profits of Stock," Ricardo says that the rise or fall of wages in 
the stationary state is regulated wholly by the increase or de- 
crease of the population. In the advancing state it depends on 
whether the capital or population advance at the more rapid 
course. In the retrograde state it depends upon whether 
population or capital decrease with the greater rapidity.' 

As the income mentioned by Adam Smith was that of the 
employer, and in his view would exercise influence on wages 
only so far as it was used to employ domestic servants, the in- 
come side of Adam Smith's wages-fund would be naturally 
neglected so soon as writers come to regard the most im- 
portant case of wages as arising when men were employed for 
a profit. Neglected it certainly was and, if for the reason 
stated above, the negligence is justified. But viewing Eco- 
nomics from the side of production, and production from the 

1 Works, p. 379. 



62 GERMAN WAGE THEORIES [^^g 

side of capital, English writers were led away from consump- 
tion and the demand of consumers as leaders in economic 
activity. It is at this point that Hermann made a departure 
from the traditions of the science, and intercepted the parallel 
course of thinking on wages in England and Germany. Cap- 
ital is repudiated as the source and determinant of wages. The 
key to the situation is no longer held by the employers but by 
the consumers. Employers are mere agents, middlemen, who. 
do the consumers' bidding for a commission. The consumer 
is the real buyer of labor. All the steps leading to the final 
product are taken for the final consumer. The true and con- 
tinuous source of compensation for production is the income 
of the buyer of the product for his own use. 

This doctrine has been followed generally by the German 
economists ; but in England it has not received very strong 
support. In the first place, Mill attacked its main position in 
his famous proposition that a demand for commodities is not a 
demand for labor. Mill thought it important to support this 
proposition because its contrary was so widely assumed by 
common apprehension ; and because, with the exception of 
Say and Ricardo, most economists fell into the error in 
some part of their thinking. Up to Mill's time, however, it 
formed no integral part of their theories of wages. Although 
of late some of Mill's reasoning on this point is not accepted, 
the whole of it passed practically unchallenged for twenty 
years. In the second place, when Longe and Thornton 
adopted Hermann's point of view, and tried to persuade their 
countrymen of its soundness, with some success, if judged by 
Mill's action, Cairnes submitted the doctrine to a careful 
analysis and published the results in the form of an elaborate 
attack in his " Some Leading Principles in Political Economy 
Newly Expounded." 

There is something very plausible in the idea that demand 
for commodities determines the aggregate amount of wealth 
spent in wages. It is of a kind with the popular conviction 



259] CRITICISM 6^ 

that the " extravagance of the rich is the gain of the poor," or 
that " profusion is for the good of trade."^ 

The source of the error, as to wages, seems to be the failure 
to distinguish between general and particular wages, wages of 
all laborers and those of groups of laborers. The discussions 
on wages are for the most part grouped about three questions : 
(i)What is the true source of the quantity of real goods which 
laborers as a body receive ? (2) What determines the quan- 
tity? (3) What determines the share of any particular group? 
Let us consider briefly these questions in the order stated. 

I. It is evident that it is from the total productions of society 
that ultimately all wages must come. It is also evident that, 
under our present system, wages cannot absorb the whole of 
that product. The first difference of opinion appears when 
the attempt is made to designate the particular part of this 
total product which furnishes wages, or the habitual form 
which it assumes as a source of wages. 

All goods have a career. For some, the career is short, for 
others long ; some are destined to give direct enjoyment to 
society, others to help in the process of production. The trac- 
ing of the career of goods is a comparatively simple process. 
Under our wage system they are first in the hands of the en- 
trepreneur class, then in those of the trading classes, and finally 
in those of the consumers or users. To be sure, some goods 
suffer destruction by fire and some by accident, while some may 
revert to the trading classes as second-hand goods ; but if they 
fulfill their proper destiny, they finally disappear in the users' 
hands. There is a continual inflow at the one end of the line, 
and a continual outflow at the other. The complication comes 
when we attempt to note the causes which determine the posi- 
tions which classes hold with reference to the flow and ebb of 
goods, and the relations of the classes to each other as an out- 
come of the various positions. Could we cause the economic 

1 Cairnes, Political Economy, p. 163. 



^4 GERMAN WAGE THEORIES [360 

flux and the social flux to cease for a time while we noted the 
various positions of goods and classes, we would find some 
goods just issuing forth, others passing away, still others in all 
stages of intermediate progress. We should also find all 
classes of men concerned with the dissipation of goods in the 
process of what we call consumption. There is great diversity 
in the value of goods thus consumed, as also in the economy 
and profuseness of consumption. 

Of these some take no part whatever in the inflow of goods. 
Of those who do, we distinguish (i) the so-called small pro- 
ducer who combines his labor with some accumulation in the 
production of goods ; (2) those who have large accumulations 
of their own, or that which belongs to others ; (3) those who 
have little or no accumulation, and are employed by the 
second class. The problem of distribution is a study of the 
causes which determine, for final consumption, the propor- 
tionate assignment of the total productions of society to social 
classes. And the wage problem, as a part of the question of 
distribution, so far as the source of wages is concerned, is a 
double one. ist. To what stage must products arrive before 
they become the source of wages ? 2d, Into the possession of 
what class must they come to be such a source ? Some hold 
that the source of wages is a portion of wealth held by em- 
ployers in its form of food (capital) ; others that part which the 
laborers have immediately helped to produce (product) ; still 
others that part held by dealers of commodities in the form of 
laborers' consumption goods held for sale, i. e., capital in the 
hands, not of employers, but of merchants; and, finally, some 
regard it as that part of wealth which is, or is about to be, in 
the hands of the consumers of laborers' product as a money 
income. Hermann and his followers, of course, are identified 
with the last view. 

II. The second question pertains to the determination of 
the quantity of real goods going to labor. As men differ in 
regard to the source of wages, so they differ as to the cause of 



36 1 J CRITICISM 65 

the amount. Those who look to the employers' capital as the 
source, think that the state of the arts principally determines 
what portion of total capital shall be used to employ labor. 
This determines the sum total that can be divided among 
laborers. Those who look to labor's product as the source, 
lay stress upon labor's efficiency or productivity as chiefly 
iixing the quantity. Here the element of time is important, 
for in short periods contract may prevent an adjustment to 
efficiency. A perfect competition on the part of capitalists is 
also postulated in order that interest may be kept at a mini- 
mum rate and prevented from absorbing the share of laborers. 
Those who look to merchants' capital as the source of real 
wages make the volume of the flow of consumable goods to 
laborers dependent upon the volume of money wages. Such 
wages are in general dependent upon employers' means. 
Hence a rise in wages, other things being equal, can occur 
only if the directors of industry are able to add to their money 
resources and enlarge their undertakings. Finally, those who 
appeal to the income of consumers rest their case upon the 
assumption of a more or less definite proportion between 
wages and consumers' income. This is also the point of view 
of Hermann and his followers. For completeness there ought 
to be some attempt to distinguish between the power of con- 
sumption of laborers and that of other classes, and the extent 
to which laborers are the consumers of their own products. 
On the most superficial view, it must appear that laborers and 
their families, constituting as they do a considerable propor- 
tion of the population, are large consumers of their own pro- 
ducts. Just in so far as this is true, wages appears as a 
determinant of itself, and thus we reason in a circle. Her- 
mann did not escape this kind of reasoning, though Brentano 
did. 

IH. Writers on wages have not always distinguished be- 
tween general wages and group wages. Some have evolved a 
theory explanatory of the wages of laborers as one body 



56 -. GERMAN WAGE THEORIES [362 

opposed to all other classes. They have determined certain 
principles applicable to .the larger problem, and then have pro- 
ceeded to draw certain conclusions about the wages of groups 
based upon those principles, without perceiving the change of 
problem. Others have pursued the opposite policy. Having 
perhaps correctly observed the relation of cause and effect in 
the case of wages of groups, the principles so evolved are 
likewise used as a solution of the other problem, which is so 
different. Hermann and his followers seem to be guilty of 
this last error. They observed that individual employers enter 
upon industry with a view to gain profit, that they regulate 
their production by their customers' demands. If demand 
increases, more is invested; if demand falls, less is invested. 
This increase or decrease of investment carries with it corre- 
sponding changes in the amount paid in wages. As individual 
employers do, all do; therefore wages depend ultimately upon 
consumers' demand. 

If we have regard to a single industry, it seems clear that 
the investment of capital and the total amount paid in wages 
follow closely the lead of consumers' demand. There can 
be little question but that it is effective in distributing the 
relative amounts of capital over the whole field of pro- 
duction. Production is for no other purpose than to meet 
the varying demands of men, and capital is ever on the alert 
to anticipate, if possible, the growing and changing wants of 
humanity. There is thus a re-shifting of industry and employ- 
ment, and wages are sensibly affected, at least for short periods. 
However, even here it can scarcely be said that demand 
determines the amount of investment. What it does is to 
influence it more or less. These matters are important as 
throwing light on the determination of group wages. But the 
problem of general wages is a different one. Here we view 
income as a whole, and industry as a total. The effectual 
demand of society is the offer of total income. We are unable 
to conceive of an increase or decrease of demand without at 



363] CRITICISM , 67 

the same time conceiving an increase or decrease of produc- 
tion. In the view of Hermann, an increased demand is viewed 
as a cause of which increased investment and increased pro-- 
duction is the effect. While viewing total demand and total 
production, increased production must ever be the cause of 
increased demand. We see, therefore, how unfitted this theory 
is as an explanation of general wages, although it may throw 
light on particular wages.^ 

^ See Caimes, Political Economy, and Taussig, Wages and Capital. 



CHAPTER IV 



VON THUNEN 



JoHANN Heinrich VON Thunen, born 1783, died 1850, was 
a Mecklenburg aristocrat who, as a scientific land cultivator, 
endeavored to put to a test, on his own property, the 
theoretical conclusions of his economic studies. He is re- 
garded by the Germans as their most original theoretical 
economist. As a close student of English political economy 
he professed to have little confidence in its conclusions; yet he 
did not succeed in emancipating himself from either the char- 
acteristic method, or some of the more important results of his 
English preceptors. There runs through his thinking on the 
subject of wages the fundamental assumption that neither 
wages nor interest can rise except at the expense of the other. 
They are supplied from a fixed amount, and whatever causes 
a rise in one must produce a corresponding fall in the other. 
He proceeds, as Smith and Ricardo, did by assuming simple 
primitive conditions or hypothetical cases. His method is 
wholly deductive and highly abstract. 

Thiinen's confidence in future economic peace is disturbed 
by his belief that the laborer is separated from the results of 
his productive power.' It was his opinion that, so long as 
such a state of things lasts, hostility between labor and capi- 
tal is inevitable and not without justification. Under present 
arrangements labor does not get all it produces, but there is no 
reason in justice why it should not. It is not enough to ask 
what wages are. We must enquire what wages ought to be. 

' Der Isolirte Staat, ii, p. 2 lO. 
68 [364 



365] ^^ON THUNEN 69 

Wages are, roughly speaking, determined by the relation of 
supply and demand, and under this influence they tend to the 
standard of life minimum. This point is treated in a most 
original manner, if we remember that it was written in the 
early part of this century. Business men will employ addi- 
tional laborers up to the point at which the last laborer 
employed produces his own wages ; beyond that they can- 
not go without loss ; to that point self-interest prompts 
them to go. Under the operation of competition all laborers 
of like grade receive the same wages as the last one em- 
ployed. If at this point all are miserable, what remedy is 
there ? The undertaker cannot be blamed, for, while he 
may make a surplus from the earlier laborers employed, to 
suppose that he will bestow it as a free gift to his laborers 
is to fail to distinguish between moral obligations and busi- 
ness principles. A rise in wages without a decrease in the 
number of laborers employed is not possible, for then the last 
employed laborer produces less than his wages. Employers 
must discharge men until wages equal production. On the 
other hand, rather than remain breadless, discharged men are 
willing to work at a figure which makes their employment 
possible. If we suppose an increase in the number of laborers 
without a corresponding increase of capital and land, wages 
must fall, for the undertaker can employ additional labor only 
on less productive objects. If laborers increase, in spite of 
sinking wages, the only limit to population is the means of sub- 
sistence. How productive the object is upon which the last 
laborer is employed depends upon the supply of labor. The 
greater the supply of labor, the less productive will the capital 
be upon which the last laborer employed works. To what 
limit wages may sink depends upon the sum of the means of 
subsistence. Between the real worth of labor, the supply of 
labor, and the means of subsistence of labor there is an inti- 
mate connection. The economists have considered the last 
two factors only, and have thereby drawn the conclusion that 



70 GERMAN WAGE THEORIES [365 

Providence has designed for laborers nothing except necessary- 
support during the period of their Hfe.^ Such a conclusion can 
not be admitted, and will be found to be scientifically unten- 
able when we have investigated the real worth of labor. 

Von Thiinen complained that Adam Smith's law of the rela- 
tion of supply and demand as determining wages was dependent 
upon changes in the national wealth. He desired to discover a 
law of wages for a persistent condition of society. In such a 
condition, demand and supply are in equilibrium ; each cancels 
the other. Since they appear to be inactive, there must be some 
other law. To the question, what is the natural share of the 
laborer in products brought forth by him, Adam Smith 
answers, that which he usually gets. But that which he 
usually gets through competition is subject to continual 
change. We must ask which one of all those actually received 
is the right one, the natural one. Adam Smith did not investi- 
gate this question." 

If we compare von Thiinen's conception of natural wages 
with that of Ricardo's, we find them quite different. Ricardo 
was the analyst of actual economic facts. In the realm of 
distribution he sought to establish no reform. Hence he of- 
fered no criticisms of the social method of awarding shares. 
To his mind the essential task at that time was to establish, if 
possible, beyond all question, what the social method actually 
was. He found it convenient to adopt Adam Smith's distinc- 
tion between wages which fluctuate in short periods accord- 
ing to the varying strength of demand for labor, and wages 
which prevail in the long run and are connected with the de- 
crease or increase of population. Ricardo called wages nat- 
ural which enabled laborers under the influence of climate and 
habit to perpetuate their kind without increase or diminution. 
Von Thiinen's interest in economic questions was different. 

1 Der Isolirte Staat, ii, p. 86-90. 
'^ Der Isolirte Staat, ii, p. 64. 



T^Oy] VON THiJNEN 7 1 

He was not less keenly alive than Ricardo to the importance 
of a theoretical statement of actual distribution, and in this 
field he achieved probably as notable success. But he brooded 
over the miseries of the poor, and sought for the causes in the 
national economic system. To him a wage which was divorced 
from correspondence with production was unjust and unnat- 
ural. In a word, he called wages natural when they were in 
agreement with justice ; and justice required that a man should 
be rewarded according to his production. But in seeking the 
law of wages the interests of both capitalists and laborers 
must be taken into account. 

To eliminate the complicating effect of rent, von Thiinen 
seized upon the idea of the isolated community. He supposes 
a large city situated in the centre of a fruitful plain. To 
eliminate unnecessary causes of unequal opportunity, he sup- 
poses the plain not crossed by river or canal. At a consider- 
able distance from the city the plain ends in a wilderness which 
wholly separates the supposed state from the rest of the world. 
All laborers are equally strong, wise and skillful. The num- 
ber of laborers remains the same, i. e., there are just enough 
children brought to maturity to fill the ranks depleted by age 
and death. The population is also so limited that plenty of 
land awaits occupation. Hence there is a border where no 
rent is paid, for rather than pay rent the Bajier would take new 
land. Conditions on the border determine for the entire com- 
munity what wages shall be paid, for there wages are not 
determined by the will of the employer, the competition of 
laborers, or the means of subsistence, but by what the laborer 
can himself produce. Such wages are paid throughout the 
entire community by the force of competition. Conditions on 
the border also determine interest, since there capital has its 
highest uses, and being highly volatile, it finds the place of 
highest reward. Von Thiinen was careful to credit as much 
to interest as belonged to it. Not all that falls into laborers' 
hands, ostensibly as wages, is properly to be considered as 



72 GERMAN WAGE THEORIES [368 

such. Nearly all workmen are furnished with equipment of 
one sort and another, such as implements or tools to assist 
them in labor, and a part of what they receive is to be ac- 
credited to interest for their use. 

In order that labor may not be at the mercy of competition, 
he supposes conditions under which labor may freely apply 
itself to unoccupied land. An investigation as to how high 
wages may be under these conditions will teach us what 
natural wages are, for here the laborer will get what belongs 
to him. The total product is divided between two claimants : 
laborers and capitalists. It will be found that the interests of 
both are best subserved when the so-called natural wages are 
paid. The problem, then, is to determine the relation of the 
rate of wages to the rate of interest. This Von Thunen at- 
tempts to do by reducing the efficiency of capital to labor- 
terms. It involves the most difficult problem of determining 
the shares attributable to labor and capital out of a product 
which is the result of the two in co-operation. Before enter- 
ing upon this discussion, it will be perhaps best to give some 
explanation of the mathematical terms employed. 

A represents the wages for the year of a family, including 
the wife and young children under fourteen years old. These 
wages are expressed in bushels of rye. To determine 
how much such a family would consume would manifestly 
depend upon the number of children. In this investigation it 
is von ThiJnen's aim to find a law for the regulation of wages 
and rate of interest for the stationary state of society; hence 
the working population is supposed to be constant. Each 
family will therefore on the average succeed in raising a suffi- 
cient number of children to replace the losses by age and 
death. The necessaries of life, which are required to keep 
such an average family in labor power for a year, are assumed 
to be such 'value as is equal to the value of a bushel of rye. 
If from the total wages A the necessaries be subtracted, there 
will be a surplus which is designated by the letter y. Then 



369] ^(^^ THUNEN 73 

A = a+ y. That part of the gross product which is left after 
deducting repairs of all sorts, costs of raw material, and admin- 
istration, as well as profits to the undertaker as such, is called 
by Thiinen the " product of labor." This is a technical ex- 
pression, as evidently the product is the joint result of the co- 
operation of labor and capital. If we divide the product of 
labor by the number of laborers employed, we get the amount 
of the labor-product of one man, which is designated by "p." 
We now turn to the reduction of the efficiency of capital to 
labor-terms, and it is necessary to follow our author somewhat 
closely. If we suppose a capital Q and a wage a+ y expressed 
in bushels of rye, dollars, or any other measure of value, and 
that Q be divided by a + y, we have as a result an expression 
for capital in terms of the year's labor of a family, or we have 
discovered how many years' labor of a family a capitalist with 
Q capital can employ.' If this labor quantity be represented 

by nq, then = ng, and Q — nq{a -f 7). If a -{-y be re- 

a -\-y 

garded as equivalent to a unit of capital, then Q = nq units of 
capital. In case the capitalist lends his capital to an under- 
taker who employs n laborers, then each laborer is assisted by 

-^ = q capital. The product of a laborer employed with a 

capital q for a year is designated by "/;" p, then, is a joint 
product, and the problem is to find an equitable division be- 
tween the laborer and capitalist. If ;? laborers are employed, 
the product of all laborers is np ; their wages are n[a -[-y) ; the 
capitalist has the difference: Jtp — n{a+y^ = n {p— [a+y']). 
The capital employed is nq{a-\-y). If the rate of interest be 

designated by z, then . = ^K^" ["+fI L ^-(^+f) . The 

laborer's share can now be expressed in terms of labor-product^ 
rate of interest, and capital. 

^Der Isolirte Staat, ii, p. 124. 



74 GERMAN WAGE THEORIES ■ [070 

„ /" — ('^ + ?^) • , ■ , / 

"7(^+3^ '^ obtained qz{a+ )^ = p-{a-\-y); 

from this is obtained the following: 

(i + qz) [a + j) — P; whence 

a + r = — — — = laborer's share. 

The capitalisfs share is found by subtracting the laborer's share 
from the product of labor: 

/ 1- ^P^P^^-P ^ IMI ^ capitalist's share. 

I + gz I ■\- qz I + qz 

From the above it appears that the relation of the laborer's 
share to that of the capitalist is as i : qz. This relation may be 
variously expressed : The reward of q units of capital equals 
the wages of qz laborers, and the reward of one unit of capital is 
equal to the wages of ^^ laborers, or as is subsequently required 
in the discussion : The wages of one year's labor are to the earn- 
ings of q units of capital as i is to qz, or the wages of one year's 
labor are to the earnings of one unit of capital as i is to z. 

Von Thiinen has now succeeded in finding a mathematical 
expression for the relation of the reward of capital and labor. 
He must proceed one step further to express the relation of 
their efficiencies. Since in the production of one and the same 
product /, a part of the capital may be replaced by labor and 
vice versa, it appears that each is a competitor of the other. 
It is therefore in the power of the undertaker who with Q 
capital hires, say n laborers, to give any desirable value to q 
by increase or decrease of the number of laborers. The 
undertaker who knows and follows his interest will raise q to 
the point where capital-cost and labor-cost are in direct relation 
to the efficiency of both. Hence the reward of both capital and 
labor is measured by the efficiency of each.^ If the reward of 
labor is to the reward of capital as i is to z, and the efficiency of 
labor is to the efficiency of capital as the reward of labor is to 

^Der Isolirte Staat, ii, p. 126. 



27 1] VON THUNEN 75 

the reward of capital, then the efficiency of labor is to the effi- 
ciency of capital as i is to z. We arrive, then, at the following 
very important conclusion : When capital and human labor are 
measured by the same rule, viz., the year's labor of an individ- 
ual man, the rate of interest, "^," is the factor by which the 
relation of the efficiency of capital and that of labor is ex- 
pressed. By this we can reduce to labor terms the co-operation 
of capital in the production of goods. Furthermore, in so far 
as land rent does not enter, it is possible by this to express in 
terms of labor the cost of production of a commodity, and 
thereby labor becomes a true measure of the value of goods.' 
The place which the " reduction of the efficiency of capital to 
labor-terms " has in the general discussion will be more clearly 
seen later on. Von Thiinen has to exercise constant care that 
at every step in the process no unknown term shall be allowed 
to do duty for known ones. He started out to obtain an ex- 
pression for natural wages. He has obtained an expression for 
wages under existing conditions with which he cannot rest, for 
it contains too many unknown quantities. In the expression 

a+j/ — —-£ — the value of <2;+_;/ is dependent upon the value 

of .s", so that to get the value of a+f we must know the value 
of z. Now p is not constant, but increases and diminishes 
with the value of q and is therefore dependent upon it. Upon 
the value of p depends again the value of jj/ and z. There- 
fore p, y and s are functions of q. The problem therefore 
is to find the value of p,y and s for a given value of q.^ He 
then turns to his favorite hypothetical society in paragraph 
1 4, in which he says that it is on the margin of cultivation 
of the isolated state that we are to find the conditions 
for the development of the relation between wages and the rate 
of interest.^ Here it is possible to be free from the confusion 

1 Der Isolirte Staat, ii, p. 127. ''■Ibid., p. 139. 

' Ibid,, p. 140. 



^6 GERMAN WAGE THEORIES \'\T2 

due to the presence of land rent. Here laborers are free to 
choose whether they will continue as wage laborers or move to 
unoccupied land and lay out a property of their own. If 
laborers are to be kept as farm hands, their total income, made 
up of wages and interest upon capital required to lay out a 
farm, must equal the product of labor procurable from a marginal 
farm which they might themselves have laid out.^ Von Thiinen 
expresses this mathematically. If wages = a +y, product of 
labor =p and the capital required to lay out a small farm = 
^{a+y) — all expressed in bushels of rye — and the rate of in- 
terest = s per cent., then that laborers may be retained the 
following equation must hold: a+y + q{a+j/)s=p. From 

this results: <^+jj/= --^" ; and z= ^ }^ , V - In this ex- 
1+ gs' q{a -\-y) 

pression under the conditions assumed a, p and q are constant 
quantities, only y and z being variable. It is of the first im- 
portance to find the exact relation between y and z, for upon 
that solution depends a knowledge of the relation between 
wages and interest.^ He then undertakes to find an expression 
for jF which does not contain the quantity for z. 

He supposes that a number of laborers form a combination 
on the margin of cultivation of the isolated state to put into 
cultivation a new farm. That there may be no disadvantage 
attached to this farm on account of its size, it is supposed to 
be as large as the average in the state. The laborers united 
for this purpose divide themselves into two groups. Group I 
is busied preparing the land for cultivation, erecting buildings, 
etc. Group II is composed of men who for the time being 
remain as laborers for hire, and by means of the surplus which 
they have above that required for their own support, offer the 
means of support of Group I. Under these conditions, says 
von Thunen, in the preparation of the farm, none of the 
existing national capital is consumed. The sum of those 

' Der Lolirie Staat, ii, p. 141. "^Ibid., p. 142. 



373] VON THUNEN y-j 

objects of value after completing the farm is as great as be- 
fore its completion. The new farm has cost labor, and noth- 
ing but labor/ These two groups of laborers have really 
devoted their surplus to the production of this farm, and 
the farm may be spoken of as their invested capital, the 
interest of which must come from the future products of 
the farm. Groups I and II are called throughout von 
Thiinen's discussion " capital producing laborers." Now the 
question occurs, how shall the wages of farm hands be de- 
termined ? Von Thiinen answers that it must be sufficiently 
high so that the surplus of a laborer put out at interest will 
equal the interest of a " capital producing laborer;" for if this 
were not the case the laborers would immediately go to capi- 
tal producing. It is the interest of each, both laborers and 
capitalists, to get as high a return as possible, but there is no 
opposition between the two classes. In economic life, as we 
know it, if efficiency is not affected by changes in wages, capi- 
talists' interests are promoted by lowering wages; but, under 
the simple conditions which von Thiinen supposes, this does 
not follow. As will be more clearly seen later on, the follow- 
ing question is to the point: what rate of wages can capitalists 
pay and draw the highest rate of interest, supposing the effi- 
ciency is not considered, and that capitalists were to have the 
same rate of wages when they were producing capital ? To 
show what he means by this question, and also as an aid in the 
solution of the same, it will be necessary to recur once more 
to his use of mathematical symbols, n represents the number 
of labor families whose continuous labor is required to culti- 
vate the farm after its preparation, nq represents the number 
of laborers in Group I. In this expression is included the co- 
operation of capital." A laborer employed with g capital pro- 
duces p, and the product of ft laborers equals ftp. Group I 
has in the course of the year consumed anq bushels of rye. 

1 Der IsolirU Staat, ii, p. 151. * Ibid., ii, p. 152. 



78 GERMAN WAGE THEORIES S^IA 

Since Group II devotes its surplus to the support of Group I 
there are as many laborers in Group II as the number of 
times that J, the surplus of each man, is contained in anq, the 

amount consumed, hence the expression — ~ . The whole 

y 

number of " capital producing laborers " then is nq + ^— = 

y 

nq . The entire wage expense for farm cultivation is 

n [a -\- y). If we subtract this outlay from the total product 7ip 
we have 7ip — 7i{a+y) = n [p — [a +jf]). It is the yearly pro- 
duct of the farm, which belongs to nq — and is their profit, 

y 

or interest on the capital invested. To find each man's share 
we only need to divide the farm profit by the number of 

owners. Therefore — ^ — ^ ^' = ^ -^ — 1= yjU equals 

a±y^ fiq{a+y) 

y 

each man's share. 

The question next occurs: how is the share of each "capital- 
producing laborer " affected by changes in the rate of wages ? 
It is here assumed that the requirements of life, "«," remain 
the same, and that any change in wages affects y, the surplus 
only. It will be seen ' that changes in y result in contrary 
effects upon each capital producer's share. First, an increase 
or decrease of jy is equivalent to an increase or decrease in the 
cost of the cultivation of the farm. So far an increase of y 
works to the detriment of each man's share, and a decrease of 
y works in favor of each man's share. Second, on the other 
hand, an inspection of the expression for Group I reveals the 
fact that an increase of j/ results in a decrease of the number of 
owners, with a resulting increase in each man's share. The 
decrease of y gives a contrary result. Hence changes in y 
work double and opposite results. It follows that there must 
^ See table below, p. 79. 



375] 



VON THUNEN 



79 



be a fixed amount for the labor surplus at which the profit 
share reaches its maximum amount. Von Thiinen shows by 
means of the following table how — the product 300 c being 
unaffected, the wages increasing — the profit share is affected, 
supposing the number of laborers to remain a constant : 



Where 

a-\-y 
equals 



Capital in 
Group II 
reduced to 

labor. 
^=12 y'rs 1. 



Capital in 

Group I reduced 

to labor. 

^^ year's labor. 

y 



Sum of labor 
in Groups 
I and II. 

q{a + y) 



Interest on 

farm 
investment. 



A single capitalist 

receives 

p—[a+y] y 

q {a-^y) 



150 c 
180 c 

2IO c 

240 c 
270 c 
300 c 



100 X I2_ 
20 

100 X I2_ 
5° 

100 X 12 
80 

100 X 12 
110 

ICO X 12 
140 

100 X 12 
170 

100 X 12 



12(100 + 20) 



24 

= 15 
= 10.9 

8-57 
=7.06 
=6 



19.06 



300 c — 120 c= 
180 c 
150 c 



120 c 
90 c 
60 c 
30 c 



300c [lOO + 2o]20 



12(100 + 20) 



=2.5 C 
4.16 c 

4.44 c 

3.91 c 

3.92 c 
I.S7C 



It is seen that the total number of " capital producing 
laborers " decreases with the increase of y because a smaller 
number of Group II is required to support Group I. We see, 
too, that total farm profit decreases because the more the 
laborers take from a constant product, the less is the remain- 
der. The profit share of each man increases for a time, but 
later diminishes till finally the farm laborers get all that is 
produced. This gives the conclusion again that there must be 
a point in the amount of wages where the profit share is the 
highest. The specific question is : what value shall y have in 



order that the profit share 



shall have its maxi- 



q{a-^y) 
mum value ? This is a question for the calculus. Accord- 



3o GERMAN WAGE THEORIES [376 

inglv — — — — . ^}' - must be differentiated with respect to y 
and the differentiation placed equal to o. 

=q {a-\- y) [p — a — 2y) dy — {py — ay —f) qdy —■ o 
therefore {a +y) (p — a— 2y) =py — ay —f' 
ap — d' — 2ay + py — ay — 2y'^ ~ py — (ly ~y^ 
ap — c^— 2ay — 2y'^ — —y"^ 
y^ + 2ay = ap — a^ 
{a+yy^ap 
a ''r y= V ap 
Expressed in words this means that it is in the interest of 
capitalists that wages be equal to the square root of the prod- 
uct of the necessaries of life and the product result of labor, all 
expressed in some common measure. Such a wage, not 
determined by supply and demand, or springing from the 
necessities of the laborer, but from the free determination of 
the laborer, von Thiinen calls natural wages/ 

This discussion, so far, aims to show that it is in the interest 
of the " capital producing laborers" that wages be V ap. If it 
can be shown that laborers themselves receive the highest 
amount as interest upon the investment of their surplus when 
wages are '^^ ap, the claim that it is the natural wage has some 
reinforcement. He proceeds to show this in the following 
manner : According to a former expression (see p. yG) (i + qz) 

(a +y) =p whence a+y~ — f- — , and r= — ^- a. Were 

I + qz I + qz 

a workman to loan at interest his surplus jj/, or its equivalent 

P • P 

— ; — —a, his total return would amount to — f- az. 

i-r qz 1+ qz 

Now what rate of interest will make this amount the largest ? 

^ Der IsolirU Staat, ii, p. 157. 



Z7T\ 



VON THUNEN 



The differential calculus yields for z the value — -- — . If 

•' ap 

P 
we substitute this value of z in the equation a-V y ~ t u- ^^ ' 

wehavea + v= 7= ^P — 

vap — a= , T^f = V ap. Hence 

\-\ — a + Vap — a ^ 

aq 

it appears that when a laborer receives V ap wages he receives 
the highest return on his surplus invested, and his interest 
coincides with that of the " capital producing laborers " when 
wages are at that figure/ 

The critics of von Thunen may be roughly divided into two 
classes. First, those who deny the validity of the formula 
because of the unreality of the assumptions upon which it is 
based. Secondly, those who impeach the consistency of his 
mathematical reasoning. The second class is more worthy of 
attention, because a mathematical criticism requires a pro- 
founder study and clearer understanding of the author. 

Roscher thinks that we cannot place so high a value upon 
the law as von Thiinen does, for it could hold only where the 
severe struggle between capital and labor does not exist. In 
young agricultural colonies, where fruitful soil exists in super- 
fluity, where every laborer can save a surplus, where there are 
no capitalists in the narrow sense, and all the laborers are 
nearly alike, and, furthermore, colonies where perhaps no in- 
dustry exists that requires large capital or superior labor, 
there a wage of V ap might be natural."^ Schaffle takes a 
similar position when he says that the law is valid only for a 
hypothetical economy. It presupposes an unchanging tech- 
nique, a mere replacement of the number of laborers, a constant 
price for grain, and other fictions which suppose variable 
amounts for constant. Especially does he regard the hypothe- 

^ Der Isolirte Staat, ii, p. i6o. 

^Geschichte der Nationaldkononiik in Deutschland, p. 896. 



32 GERMAN WAGE THEORIES [378 

sis of a constant number of laborers as in reality no basis for 
natural wages.' Likewise Lehr objects that in the formula the 
number of laborers who compete with each other and press 
down wages plays no part. But {f) the product will be 
affected by the number of laborers. With a growing popula- 
tion the amount of land not yet occupied becomes continually 
smaller and less productive. Under a given condition of 
technique, the transference to more intensive operations yields 
to the last laborer less and less. The more/ approaches a in 
amount, the more does the formula lose its significance. If 
p^^ a, then the laborer can lay up nothing. 

Objections as given above are shared by many other writers, 
as Leymarie, Mangoldt and Mithoff. Dr. Joh. von Komor- 
zinski'' has more recently and in greater detail pointed out one 
of von Thiinen's limited assumptions which is worth noting by 
itself. Von Thiinen had argued that it was for the interest of 
the laborer that his wages should be at such a point that the 
interest upon the investment of his surplus be as high as 
possible. This Komorzinski clearly points out would not be 
true for all laborers. The laborer has two sources of income: 
wages, and interest on savings. He desires that with a given 
effort the total income be as large as possible. The relative 
importance to the laborer of wages and interest on savings de- 
pends upon the quantitative relation which each has to the 
whole income. A laborer who is just beginning to save de- 
sires that his wage be as high as possible. The rate of interest 
upon his small investment is a relatively unimportant matter 
to him ; while the laborer who has saved much during a long 
period may regard the amount of his wage as a matter of com- 
parative indifference. His chief source of income being interest 
upon invested surplus, he is led to desire a maximum rate. If 

"^Das Geselhchaftliche System der Menschlichen VVirthscJiaft, 1873, P- 44°* 

"'Zeitschrift iir Volkswirthschaft, Socialpolitik und Verwaltuvg, B. iii, Heft 
i, p. 27-62. 



379] ^ON THUNEN 83 

von Thiinen's argument is to be valid, laborers must have 
saved an equal length of time and an equal amount. 

These objections are for the most part only repetitions of von 
Thiinen's stated assumptions, and we cannot suppose that he 
is taken unawares. Ricardo assumes for the economic world 
at large conditions which were familiar to him on the stock 
exchange, and upon these he developed principles of rent that 
might have been more accurately developed if he had been 
more familiar with farm economy. Subsequent thinkers have 
had to make the necessary corrections. Ricardo's assumptions 
were not so violent as to belie his observations, for he really 
thought his assumptions, in general, were true. This cannot 
be said of von Thiinen. He did not attempt to develop princi- 
ples of banking investment based upon farming experience. 
Had Ricardo written on the exchange he would have traversed 
paths familiar to him. When von Thiinen wrote on farming he 
wrote accurately. He was a practical farmer, as well as a 
scientific thinker. The world of his assumptions and that of 
reality are too far removed from each other for us to suppose 
him ignorant of the radical difference between them. He is con- 
stantly drawing contrasts between reality and the isolated 
state. He has a different law of wages and of interest for each. 

How shall we explain his confidence in a law based upon 
conditions so far removed from the real world and so lacking 
in completeness ? Only on the assumption that he regarded 
present conditions as unnatural, and the wage of the present 
order as an unnatural wage. He said that the present regime 
was likely to result in the starvation and misery of the labor- 
ing classes. The present system must therefore lack equity. 
He professed to have investigated the relation of wages and 
interest from several standpoints, and to have found that, when 
wages were at V ap, they agreed with the nature of man, and 
of the physical world.^ He regarded his formula as a foot- 

^ Der Isolirte Staat, ii, p. 206. 



84 GERMAN WAGE THEORIES [380 

rule by which to judge whether a wage were at once natural 
and righteous. It was, therefore, to express a condition that 
in his opinion ought to exist, a goal which laborers ought to 
strive for, and one that employers and society should help 
labor to reach. 

We cannot but admire the spirit of von Thiinen, who, in 
mediating between the extremes of the adherents of the " iron 
law " and those of the socialists, endeavored to lay a scientific 
foundation for the elevation of mankind. That he does medi- 
ate is shown by an inspection of the formula. If/ were equal 
to a, then, according to the equation, wages would equal the 
necessaries of life, and wages would absorb the entire product. 

But with von Thiinen, p is always greater than a + j. Wages 
then would be above the necessaries, but below the total pro- 
duct. Most men regard this as just. Our admiration of 
his spirit, however, must not blind us to the faults of his work. 
A man may love his neighbor, and may give him a formula by 
the realization of which in life, he may be landed in a state of 
comfort and right economic relations with his fellows. But if 
that formula can be realized only in a state of society far re- 
moved in nature from the present, and if that state, in addition, 
is so primitive and simple as to preclude the social complexi- 
ties of modern life, the author of the formula may not com- 
plain if he is rejected as an unsafe and impractical social guide. 
Such is the position to which von Thiinen is reduced by this 
method of criticism. 

The second method of criticism is quite as important in re- 
sults, assuming the points well taken, because it discredits the 
mathematical reasoning by which the formula is evolved. 
1 The method of procedure is to show that von Thiinen treated 
as constant or known some quantity which in reality is vari- 
able or unknown. Among the first to do this was Falck.^ 

1 Falck, Die Thunensche Lehre vom Bildungsgesetz des Zinfusses und vom 
naturgemassen ArbeitJohn. 



28 1 ] VON THUNEN 85 

He says " the formula ^ — , , , -''^ was obtained from the 

q {a + J/) 

nip—{a+y)'] 
formula nq{a-\-y) . The numerator denotes the rent 

y 

from the farm, the denominator the number of those among 
whom the rent is divided. But is the y of the denominator 
really equivalent to the y of the numerator ? The y of the 
numerator denotes the surplus that is paid to the laborer at 
this particular time ; but the j of the denominator denotes the 
surplus of wages that existed before the laying out of the farm. 
Only by placing the two jj/'s equal to each other has it been 
possible for the rent (or interest) to obtain a maximum value 
at a definite rate of wages.'" This would be a just criticism if 
it were conceived that von Thiinen was dealing with two widely 
different economic regimes at the same time. But a sympa- 
thetic study of von Thiinen makes it fairly clear that he regarded 
the economic conditions under which both Group I and II 
worked as identical. He assumed that natural wages already 
existed in the isolated state ; and as a means of discovering 
the mathematical expression for such wages, he supposed that 
a number of laborers, to whom it is a matter of indifference 
whether they labor for wages or cultivate a marginal farm on 
their own account, combined to lay out a farm.^ If the social 
arrangements are the same in both cases ; if the society is sta- 
tionary, as the isolated state was conceived to be; if men were 
equal in skill and the standards of life were the same among 
them all, then the necessaries or life subtracted from an equal 
wage would have equal surplus, and the j^-'s would be equal. 
Thus Falck's objection falls to the ground. 

Komorzynski in the article referred to above also attacks 

1 Quoted by H. L. Moore in his Von Thiinen^ s Theory of Natural Wages. 
See Quarterly Journal of Economics, v. 9, p. 389. 

''' Q- J- of Econ., V. 9, p. 391. 



86 GERMAN WAGE THEORIES [382 

the formula, but in a somewhat different way. He inquires 
whether a general relation between the rate of interest z and 
wage surplus y exists which finds its proper expression in 

z = - — -^^^ — — . He defines p as the exchange value of the 
q{a+y) 

product after the deduction of all outlays except wages and 
interest on capital, q {a 4-j/) expresses the value of the capital 
invested. ^ = the number of year's wages which equals the 
value of the capital. The question now relates to the pro- 
priety of treating / as constant, and of valuing capital in the 
manner indicated. That/ should not be treated as a constant 
must be evident, says Komorzynski, from the fact that / is a dif- 
ferent quantity in every different process of production. More- 
over, it is straining matters to suppose / the same when great 
changes may occur in wages and interest. Likewise the value 
of the capital, a complex of goods, is treated as constant, al- 
though the formula for wages, a changeable factor, is used to ex- 
press its value. It is difficult to regard capital as having a static 
value when it is itself a dynamic entity. The goods of capital 
become in turn products, and other goods take their place, yet 
the value is conceived as the same. Products of one process 
find application as capital in some other production process, in 
all of which cases von Thiinen conceives the value of capital as 
dependent upon the rate of wages. Von Thiinen does not seem 
to have applied a consistent theory of price determination. It 
follows that, if p and q {a 4- jj/) vary by no known law with 

every different process of production, s = ~ — ~- — — cannot 

q{a+y) 

express a constant relation between interest and surplus in all 
industries. It is unsuited to express a general relation, how- 
ever well it may represent the relation between wages and in- 
terest in specific industries. 

Komorzynski errs in two particulars : first, in not remember- 
ing the static conditions of the isolated state; secondly, in dis- 
regarding the author's definition of/. Von Thiinen nowhere 



383] ^^ON THUNEN 8/ 

has/ represent value. If he speaks of mining,/ stands for so 
many pounds of silver; if of agriculture, then so many bushels 
of rye. It will be seen that this error vitiates the argument of 
the example upon which he relies to prove his position. He 
says, " If the rate of interest is 5 per cent, and the rate of wages 
400 florins, then, in three different forms of production, these 
equations may exist : 

" I. — ^ = — — , where p = 2,500 and q = 105. 

100 105 X 400 

,. TT 5 1200 — 400 , , J 

" II. — ^— = — , where p = 1,200 and q = 40. 

100 40 X 400 

" III. — ^ = — — , where p = 460 and q = 3. 

100 3 X 400 

" But if {a +JJ/) should rise from 400 to 450 florins, then the 

following unequal rates of interest would result : 



.,j^ 4.33 2500-450 

"II. 
"Ill 



100 105 X 450 

4.16 1200 — 450 
100 ~ 40 X 450 
.741 460 — 450,,, 



100 3 X 450 

If / represents not value but product in kind, there is no 
necessity of assuming that / remains constant when the rate 
of wages changes. Why may not / change in quantity so that 
the value of the product may so adjust itself as to counteract 
the disturbance of a change in wages ? In which case the rate 
of interest would remain the same.'^ 

The only remaining criticism of von Thiinen which will be 
noticed here is that by Professor H. L. Moore in the articles 
referred to above.^ Says Moore, " Thiinen's purpose in the 

1 Quoted by Moore, see Quarterly J. of Econ., v. 9, p. 398. 
' Quarterly yournal of Economics, v. 9, p. 399. 
^ Ibid., April and July, 1895. 



88 GERMAN WAGE THEORIES [384 

whole work is to find mathematical expressions for the natural 
rate of interest and the natural rate of wages. The method by 
which he does this is first to find a formula expressing the 
interdependence of wages and interest in the isolated state. 

The formula, z = - — -^ — v^ , we shall call formula A. In 

this formula all the quantities are known except y and z. In 
order to find the values of jf and z, he next attempts to find an 
independent expression for jf or what is the same thing, since a is 
known, an independent expression for {a +j)'); and by substitut- 
ing for {a -\- y) in formula A obtain the value of z. The form- 
ula which enables him to find the independent expression for 

n\_p-{a^y)'\ 
{a + jj/) is nq {a + y) . In this formula, which we shall call 

y 

formula B, all the quantities are assumed as known excepting j. 
But how did von Thiinen obtain the quantity itql He (von 
Thiinen) says : Suppose ' the laying out of the farm required the 
year's labor of ng men .... Unquestionably in order to provide 
a new farm is needed not only labor, but also the use of capital; 
(but) according to § 13, we can reduce the co-operation of cap- 
ital to terms of labor, and thus express the costs of laying out 
the farm entirely in terms of labor-' When we refer to § 13 to 
see how the reduction is to be performed, we find that it is done 
by means of the rate of interest. The fallacy in the argument 
is evident. Thiinen's whole procedure is a mere begging of the 
question. His problem is to find the values of y and z in the 
formula A ; and, to solve the problem, he undertakes to find an 
independent expression for {a + y) by means of formula B, and 
by substituting for {a +y) in formula A obtain the value of z. 
But, in order to get the quantity 7ig in formula B, he assumes 
that ^•'is known. If, however, z is known, then, according to 
formula A,y is known. Thiinen undertakes to find the value 
of the unknown quantities j and z; and, in attempting to solve 
the problem, he uses the very quantities that he wants to find 



285] VON THUNEN 89 

as known quantities."^ This expresses in the clearest possible 
manner Prof. Moore's position. It is a position which appears 
unassailable. I can discover no flaw in his argument ; his study 
of von Thiinen has evidently been thorough and candid. Of 
von Thiinen's critics and commentators he seems to me to be 
the best informed on the author's fundamental ideas. He was 
the first adequately to grasp the true limitations of the isolated 
state ; to note the true difference between the dynamic and static 
conditions of von Thiinen's problem. A proper emphasis on 
the last mentioned point has enabled Prof. Moore successfully 
to defend von Thiinen against those who have not adequately 
comprehended him. This same insight has enabled Prof. 
Moore to hit upon the real weakness of von Thiinen's work, 
and to show that, after all the laborious work on the isolated 
state, the conclusion is worthless. 

In two particulars, then, we find von Thiinen's formula for 
wages unsatisfactory : First, assuming the conditions of the 
isolated state as admissible, the formula is not obtained by a 
proper method. Secondly, if the formula were properly ob- 
tained, it would be useless on account of the extreme limita- 
tions of the isolated state upon which the formula is based. 

If the results based upon the isolated state may not be 
accepted, and it is found necessary to set aside that part of the 
discussion which relates to wages as of slight value, it will not 
be denied that there are some things of real interest in his treat- 
ment based upon the objective economic world. By many years 
von Thiinen anticipitated a theory of prevailing wages "•' that 
was independently developed and made known to the world 
by Professor J. B. Clark — a theory which is quietly finding its 
way into the pages of economic works, and becoming a sort of 
common property with almost no knowledge or acknowledg- 
ment of its source. As will be seen, however, von Thiinen 
found slight comfort in the theory for the future of the race. 

^ Q- 7- of E., V. 9, p. 405. '^Der Isolirte Staat, ii, p. 178-193. 



go GERMAN WAGE THEORIES [386 

He pointed out that an undertaker will not employ additional 
laborers unless they earn for him at least as much as he pays 
them. If the point of equivalence between return and wage- 
payment has been reached, then a rise of wages with a station- 
ary value of product [i. e., output of laborers) brings about a 
decrease of laborers employed, and, as a result, a decreased 
output. Further, an increase of value of product with station- 
ary wages yields the opposite result, viz., additionally employed 
labor with an increased output. Since it lies in the interest of 
the undertaker to increase the number of his laborers so long 
as by their employment a net advantage accrues to him, the 
limit of that increase is reached when the output of the last 
laborer employed is entirely absorbed by his wages. The 
wages, then, of the last laborer employed must about equal his 
output. But these wages are normal for all laborers of like 
skill, because for like service unequal wages cannot be paid. 
Employing the term "marginal" for "last employed," we 
reach the following law: wages are determined by the product 
of marginal laborers. 

Von Thiinen did not discuss this doctrine in detail. Much 
was left to the easy acquiescence or imagination of the reader. 
For instance, one feels the lack of scientific explanation of the 
true significance of marginal employment. That von Thiinen 
himself recognized the wide field ofresortforthe unemployed in 
the marginal uses of capital can scarcely be doubted, other- 
wise he could not have assigned so important an agency to it. 
That the theory attracted almost no attention among thinkers, 
who must be supposed to have read the work, may be attrib- 
uted to its fragmentary treatment. As it stands in von Thiinen's 
pages the theory is a digression. Von Thiinen laid comparatively 
no emphasis upon the matter, because he was not primarily 
interested in the statement of the law of present wages. He 
was far more concerned with the discovery of a law of distribu- 
tion, the realization of which should secure to the laboring 
class wages adequate to a reasonably high level of life. He 



287] "^ON THUNEN 9 1 

was convinced that the present system did not do this. It was 
not enough for him if the wages received were equal to amount 
produced. More important was the inquiry: Are laborers 
secure from misery and want? 

After stating the above theory of wages, he proceeds by 
means of the theory to correct some misapprehensions in re- 
gard to the labor problem. The socialists deny that one man, 
whatever his skill may be, should receive as much, or more, 
for an hour's work as another man receives for twelve hours. 
But, says von Thiinen, it is idle to complain of an undertaker 
who pays his superintendent a superior reward. He pays it 
simply because the overseer's product at least equals his wages. 
The socialists' scheme of using labor time as a measure of wages 
is a dream. The misery of the laboring class cannot be laid to 
the fault of the " entrepreneurs," for they cannot pay more to 
labor than labor is worth to them. If some one objects that 
the earlier employed laborers produce more than they receive, 
and that thus the conductor of industry has a surplus at his 
disposal for higher payments which, if he withholds, makes 
him responsible for the laborers' lot, it is to be said that such 
an objection shows a confusion of moral and business princi- 
ples. If one undertaker alone did what is here suggested he 
would be driven out of business by his competitors ; and, if a 
nation did this, it would suffer by foreign competition. It may 
be laid down as an absolute principle that no laborers should 
be employed whose output does not cover the cost of their 
employment, otherwise the wealth of society, which ought to 
be increased by the labor force of a nation, would be by it di- 
minished. No, the misery of the laboring class may not be 
remedied by an appeal to the sense of duty of the rich, but 
must be met in some other way. 

Von Thiinen proceeds to show by means of this law of wages 
that under the present system the fate of the laboring class 
may be a melancholy one. There seems to be no escape from 
the main conclusions of the theory. If we suppose wages to 



92 GERMAN WAGE THEORIES T^gg 

increase, without a decrease in the number of laborers, the 
last laborers employed do not earn their wages. Employers 
will then discharge men till the last one retained earns what is 
paid to him. Thereby many laborers are made idle, and 
rather than starve they will be willing to work for the old rate. 
Hence under these circumstances no rise of wages can occur. 
If, on the other hand, the laboring population should increase, 
while capital and land remain constant in amount, then the 
new laborers can find no employment at the present rates. 
This is plain from the fact that, since this wage already absorbs 
the entire product of the marginal laborers and every addi- 
tionally employed laborer produces less than the one previously 
employed, the hiring of the new laborers at the present rate 
involves a loss to the undertaker. It follows that the new 
laborers can find employment only at a lower rate. If addi- 
tional population makes necessary the employment of labor 
upon less and less productive objects, wages must continue to 
fall till the limit of subsistence is reached. The increase of 
population under these circumstances, bringing its attendant 
evils, seems, however, to von Thiinen a certainty. But the evil, 
he thinks, will not fall upon all indiscriminately. He holds to 
the doctrine of the salvation and survival of the fittest. By 
constitution men differ in soundness and skill. By reason of 
life's changes men's industrial fitness differs with age. Hence 
if there is a surplus of population, only the healthy, the most 
skillful, the most efficient and those in the prime of life will be 
retained. The old, the decrepit, the weak, the inefficient will 
be industrially left behind. We may thus approach conditions 
in which the only relief from actual suffering is an appeal to 
charity funds. Reckless increase of population is an evil from 
which even good harvests may not rescue us. Von Thiinen is 
haunted by the suggestion that prosperity (economically) gives 
well-being, well-being overpopulation, and over-population 
misery; and he asks whether there is no escape from this 
vicious circle. Has Providence designed that as the earth be- 



28q] von thunen 93 

comes inhabited, the future should become darkened by the 
vision of increasing misery? He thinks there must be an 
escape. Providence is not so cruel ; but clearly to define the 
conditions whose fulfilment will ensure happiness to men, is a 
problem with which he cannot attempt to deal. 



CHAPTER V 



THE SOCIALISTS 



What is often called the pessimistic side of Ricardo's eco- 
nomic ideas, viz., the side which rests wages upon some neces- 
sary demand on the part of laborers, reached its highest de- 
velopment in the socialistic view of wages. Marx,' like Von 
Thiinen, was dissatisfied with a simple appeal to supply and 
demand as an explanation of wages. According to him it ex- 
plains nothing but wage changes. " The price of labor at the 
moment when supply and demand are in equilibrium is its 
natural price determined independently of the relation of 
supply and demand, and how this price is determined is the 
question at issue.^ His treatment of wages is a unit with the 
treatment of the value of commodities. " That which deter- 
mines the magnitude of the value of any article is the amount 
of labor socially necessary for its production."^ The value of 
a commodity being determined initially by conditions of pro- 
duction, it is put into the course of trade or circulation in order 
to realize upon it, during the process of exchange, a surplus 
value. Commodity is exchanged for money, and money for 
commodity, so that with each transaction an increase of value 
or surplus is exacted. If it were otherwise, the exchange 
would not take place, A similar process, says Marx, occurs 
with respect to labor. To make this point clear, a distinction 
is made between labor-power and labor. By labor-power, or 
capacity for labor, is to be understood the aggregate of those 
mental and physical capabilities existing in the human being 

^ The references to Capital are to Sonnenschein's edition, 
' Capital, p 548, » Ibid., p. 6. 

94 [390 



39 1] THE SOCIALISTS p5 

which are exercised whenever there is produced a use value 
of any description/ Labor is labor-power in use." A laborer 
is labor-power in action. The value of the two may be, and 
usually is, quite different. The value of labor-power is the 
price of labor on the market, or wages. The value of labor 
is the value of labor-power when it is embodied in a product; 
and that value must be greater than the former, as a rule, or 
the capitalists would not deal in labor. At one point in the 
discussion, Marx sees that the price of labor-power will be fixed 
by the bargaining powers of each party to the contract. He 
also says that the minimum limit of the price of labor-power is 
determined by the value of the commodities for consumption, 
which are required to renew labor energy and to renew the 
supply of laborers from fresh generations.^ But in his further 
treatment he assumes that wages will not be much above this 
lowest limit. He does say that if it falls to this minimum it falls 
below its real value, for then it would exist in a crippled state. 
"The value of every commodity is determined by the labor 
time required to turn it out so as to be of normal value."* 

The method of converting the value of labor-power into 
the value of labor and thus securing a surplus value, is 
the kernel of Marx' severe indictment against capitalistic 
production. Assuming that the product of six hours of labor 
almost covers the cost of the maintenance of labor, or 
wages, the capitalist class is guilty of wrongful appropriation 
of all values created in the remaining hours of the working 
day. This analysis of the industrial situation has considera- 
ble enforcement in Marx' historical account of movements to 
secure a shorter legal working day. Such' movements have 
usually encountered the united opposition of the employing 
class. The inference is easy on a superficial view ; it is be- 
cause employers dread a curtailment of a surplus which they 

1 Cfl/i/fl/, p. 145. */(5zV., p, 156. 

»/<5jV., p. 152. * /i5?a'., p. 152. 



^6 GERMAN WAGE THEORIES [3^3 

have marked as their own. Marx' accumulated mass of evi- 
dence from the Enghsh Blue Books as to the barbarously- 
long hours of labor of men, vi^omen and children, exacted in 
the early history of English manufacture, constitutes some of 
the most tragic chapters of history. His account is admirably 
calculated to enlist a lively sympathy for the innocent and 
almost helpless class of wage earners, and at the same time calls 
forth deep resentment against the powerful capitalists whom 
we are led to regard as heartless and rapacious to the last 
degree. The real point made here by Marx is that, as machin- 
ery has increased the efficiency of labor to the extent of en- 
abling a worker to accomplish as much, say, in four hours as 
could formerly be done in ten, the hours of labor in a day 
have not been reduced in proportion. 

It must not be lost sight of, however, that hours of labor 
have been materially shortened as society has become ad- 
justed to machine and factory conditions of production. 
Where the factory system has developed most completely 
the hours are not so long as to excite pity. The condition 
of things in this respect under the domestic system, and 
in the early factory period, as well as those where older 
forms of production still survive, is far less favorable than in 
the fully developed factory system. In the second place, 
physical productivity of capital maj'' not necessarily be value 
productivity. Under modern conditions laborers cannot, and 
ordinarily would not, desire to be paid in the commodities of 
their own making. They prefer payment in a universally ac- 
ceptable commodity representing some proportionate value of 
their product. The working man is interested in the value of 
his total product, not in the number of pieces turned out. The 
figures commonly employed to show the enormous increase 
of productive power by the use of capital nearly always fix the 
attention upon the physical facts of the case, and the result is 
sufficiently startling. But if comparison were made only be- 
tween the values of the product with and without machinery. 



393] THE SOCIALISTS gj 

a different impression would result, especially if account were 
taken of all the labor involved in the production of the capital. 
Those who read the earlier portions of Capital and not the later 
are apt to get erroneous notions of the amount of exploitation 
of laborers which exists according to socialistic conceptions. 
If six hours of labor are sufficient to support the worker, but 
the employer forces him to add four or six hours more to each 
day's labor for the employer's special benefit, an injustice is 
apparent. But if from the product of the additional hours, 
all capital which makes possible this large production for the 
laborer, must be replaced, and all losses incident to capitalistic 
risk must be met, the amount remaining over as a true surplus 
value on a priori grounds may not appear great. Marx does 
not ignore replacement of capital. " Whatever the form of the 
process of production in a society, it must be a continuous 
process, must continue to go periodically through the same 
phases." "When viewed, therefore, as a connected whole, and 
-as flowing on with incessant renewal, every social process of 
production is, at the same time, a process of reproduction." ^ 
The very condition of production with the aid of capital, 
-whether the economic organization be the so-called " capital- 
istic " or socialistic, requires that a large share of the annual 
income or social dividend be reconverted into means of pro- 
duction, or in other words, that it be devoted to the service of 
replacement of capital whose energies have been transmitted 
into products of a lower degree, to use Menger's conception. 
Marx has devoted much space to show the process of the flow 
■of products and the conversion of apart of this flow into capital. 
And there is much in that part of his work which will repay 
■diligent study. 

However, Marx regards even the replacement of capital to 
be as much an exploitation as is the personal consumption 
of the capitalist. If we suppose that a capitalist has made an 
investment of a certain sum, and yearly devotes enough of the 

1 Capital, 1887, p. 577-8. 



g8 GERMAN WAGE THEORIES \_19A- 

product to replace the yearly wear of the capital, and consumes 
the rest, it will be but a few years when he will have consumed 
a value equal to his capital. Now, the capitalist thinks that he 
has consumed the product of unpaid labor, says Marx, and 
that he has kept his capital intact. But that is not Marx' 
interpretation. In fact, the capitalist has consumed his own 
capital, which he may have himself produced, but has appro- 
priated surplus value without payment to the amount of his 
original capital. Thus replacement is an exploitation.^ 

Of special interest is Marx' conception of the relation be- 
tween wages and product, as well as between wages and capi- 
tal. This relation is first indicated by an illustration.'' A 
peasant, who is liable to do compulsory service for his lord, 
works three days for himself and three on the lord's domain. 
Under these circumstances the peasant reproduces his own 
labor fund. If the lord appropriates to himself the land and 
other means of production of this peasant, the latter will be 
obliged thenceforth to sell his labor-power to the lord. Under 
these circumstances, he continues to work three days for him- 
self, the time necessary to obtain his necessaries, and three 
days for his lord. "As before, he will use up the means of 
production, as means of production, and transfer their value to 
the product. In the same way, a definite portion of the pro- 
duct will be devoted to reproduction [replacement]. But from 
the moment that the forced labor is changed into wage-labor, 
from that moment the labor-fund, which the peasant himself 
continues as before to produce and reproduce, takes the form 
of a capital advanced in the form of wages by the lord." 

The economists of Marx' day regarded wages as advanced 
from capital, but Marx regards wages as paid from current pro- 
duct. He says that it is only here and there on the face of the 
earth that what laborers receive as wages is not what laborers 
have already themselves produced.' He complained of classical 

1 Capital, p. 582. 2 Ibid., p. 580-I. ^ Ibid., p. 581. 



395] ^^^ SOCIALISTS gg 

economy, that it always loved to conceive social capital as a 
fixed magnitude of a fixed degree of efficiency.^ 

As will be seen in the subsequent treatment, Marx regards 
the capital of a country as constantly changing in quantity, 
and in the relative proportions of its elements. Upon these two 
facts — accumulation of capital and the change in the constitu- 
ents of capital — rests the fate of the working classes. As a 
first step in the argument, we must make clear what Marx 
meant by the terms constant and variable capital. In the pro- 
cesses of production, he desired to place in clear light the pre- 
cise part which labor performed, as well as that of capital. It 
is a common observation that, under ordinary circumstances, 
values in means of production are perpetuated in their products. 
Of this there may be more than one explanation. One com- 
monly entertained is that capital possesses the capacity in itself 
of erecting new values which take the place of those values 
dissipated while capital is performing its industrial functions. 
This view Marx rejects. Another explanation is that capital 
has no such capacity, but is a dead, inanimate, passive complex 
of things upon which labor operates. Capital can, therefore, 
create no values of any sort.'^ But human labor possesses the 
capacity to transfer values from capital, in which values already 
exist, to products. And this labor does unconsciously and 
inevitably while it is performing another function as well. It 
is a common observation of economic life that products possess 
greater value than is to be found in their means of production. 
The true explanation is, according to Marx, that while labor is 
transferring old value, it is also creating new value. Thus 
labor performs a double function in the same act. In the 
process of production itself, or that part of the process which 
is represented in the transferring of value, no quantitative 
change in value occurs. That part of capital which is repre- 
sented by means of production, by the raw material, auxiliary 

'^Capital, p. 622. ^ Ibid,, p. 383. 



100 GERMAN WAGE THEORIES [305 

material, and the instruments of labor, is called constant capital. 
On the other hand, that part of capital represented by labor- 
power does in the process of production undergo an alteration 
of value. " It both reproduces the equivalent of its own value, 
and also reproduces an excess, a surplus-value, which may itself 
vary; may be more or less according to circumstances. This 
part of capital is being continually transformed from a constant 
to a variable magnitude, and is called variable capital." ' 

Marx opposes the idea of Adam Smith and Ricardo, that 
capital in its ultimate analysis may be resolved into advances 
to labor. All surplus value is divided into means of produc- 
tion, and the direct support of laborers. It is illogical, he de- 
clares, to admit, as Adam Smith did, that in the case of the 
individual capitalist, all capital does take these two directions, 
and then deny it for the capital of society.* 

Marx does not minimize the importance of capital as a pro- 
ductive agent. He shrinks from conceiving it as possessing 
power, preferring to regard capital as loaded with value trans- 
ferable by labor. Although he is usually an unsparing critic 
of the capitalist class, at times he is forced to give capitalists 
credit for the social service of having forced the human race 
to produce and develop its powers. Without the capitalist, 
society might not have created the material conditions which 
alone can form the real basis of a high form of society, and in 
which the full development of every individual forms the ruling 
principle.' But in performing this service, the capitalist has 
exalted the principle of saving. Accumulation has come to be 
the law and the prophets. In Marx's view, at the bottom of 
all accumulation is the propensity and power to withhold from 
labor a part of its just share of social product. But capitalists 
are charged with having sometimes forced conditions which 
result in adding to their profits at the expense of laborers' 
necessary support. Wages are forcibly reduced below the 
value of labor power. 

^Capital, p. 19 1-2. "^ Ibid., p. 6oi. ^ Ibid., p. 603. 



207] THE SOCIALISTS lOI 

A second factor in accumulation is relief from the necessity 
of furnishing capital in proportion to labor employed. Any 
given capital is made sufficient by requiring longer hours in 
factories, by day and night shifts in extractive industries, and 
by the reliance upon nature in agriculture as an immediate 
source of greater accumulation. The general result is that 
" by incorporation with land and labor, capital acquires a power 
of expansion that permits it to expand its accumulation be- 
yond the apparent limits of its own magnitude.^ 

But the most important factor in accumulation is the pro- 
ductivity of social labor. All nature works in the interest of 
the capitalist. While machines are wearing out, and having 
their value transferred to products, science and technology are 
making their advances, the results of which are incorporated 
in the new machines without additional burden to the capitalist* 
Then, too, labor's capacity to transfer value from capital to 
product in the very act of creating new value, is nature's gift, 
since it is done unconsciously and without merit on labor's 
part. Capital in this case is nature's beneficiary. The same 
fact becomes evident if we regard capital from another stand- 
point. As capital increases in quantity, the difference be- 
tween fixed and circulating capital (to adopt an old classifica- 
tion, but excluding wages from circulating capital) increases. 
That is to say, the number and mass of those things which 
yield up their utilities but slowly, constantly increase in pro- 
portion to those whose utilities are transferred at once. Now, 
just so far, says Marx, as those things which lose their value 
piecemeal, are " wholly employed, but only partially consumed, 
they perform the same gratuitous service as natural forces, 
water, steam, air, etc. This gratuitous service of past-labor, 
when filled with a soul by living labor, increases with the 
. advancing stages of accumulation." ^ 

This general idea has further enforcement by a course 01 

^Capital, p. 616. "^Ibid., p. 617. * Ibid., p. 620. 



I02 GERMAN WAGE THEORIES [3^8 

argument which is designed to show the influence of the growth 
of capital upon the fate of the laboring class, and which ends 
with a melancholy picture of the pauperism to which the 
laboring population of the world is inevitably tending by the 
very essence of the capitalistic mode of production. 

Accumulation and consequent growth of capital yield the 
following results : 

I. Diminution of the mass of employed labor in proportion 
to tlie mass of the means of production. 

II. Accelerated diminution of variable as compared with 
constant capital. 

III. Increase of surplus population more rapidly than the 
diminution of the variable part of capital. 

Before taking these points in order, it is desirable to show a 
direct relation between accumulation and rate of wages. A 
rise in wages has one of two possible meanings, with reference 
to accumulation. Either it does not interfere with accumula- 
tion, in which case capital is in excess, not because labor 
power or labor population is diminished, but because, given 
excess of capital, exploitable labor-power is insufficient. It is 
not a case of stationary capital with a diminishing population, 
but one of increasing accumulation, and not enough laborers 
for capital to exploit with the highest advantage. Or, on the 
other hand, accumulation is reduced in consequence of the rise 
in the price of labor. In this case capital is insufficient, not be- 
cause of increase of labor-power, but because, by a relative 
diminution of capital, there exists more labor-power than 
capital can exploit to the advantage of accumulation. The 
rate of accumulation is the independent variable ; the rate of 
wages is the dependent one. The correlation between accumu- 
lation of capital and rate of wages is nothing else than the cor- 
relation between unpaid labor transformed into capital, and 
paid labor necessary to set the capital in motion. It is simply 
the relation between paid and unpaid labor of the same popula- 
tion. Wages rise whenever the quantity of unpaid labor in- 



399] ^^^^ SOCIALISTS 103 

creases so rapidly that its conversion into capital requires an 
extraordinary addition of paid labor, thus diminishing unpaid 
labor in proportion. But the movement of the rise of wages 
receives a check whenever this diminution touches a point at 
which surplus-population which nourishes capital, is no longer 
supplied in normal quantity, and accumulation lags/ 

The first of the above propositions, viz. : that the mass of 
employed labor diminishes in proportion to the means of pro- 
duction,^ is one very difficult to prove, and might be more 
difficult to deny. The fact that, in modern civilized countries, 
wealth increases more rapidly than population, creates a pre- 
sumption that means of production increase faster than em- 
ployed labor; but it is only a presumption. Observation, how- 
ever, supports the view that as time proceeds, of the total 
capital employed, a larger proportion is devoted to purchase 
and maintenance of means of production. The diminishing 
proportion goes to pay for labor-power. It is desirable that 
this proposition should be put to some statistical test if it is to 
be used as a step in an argument. But Marx does not do that, 
but is satisfied with very general statements, such as that it is 
brought about by the compound ratio of impulses which the 
capitalistic mode of production and accelerated accumulation 
give one another,^ or that it is due to the concentration of 
wealth, the domination of larger capitals, or the credit system. 

In the second proposition, we have a more radical doctrine 
still. It is that variable capital diminishes at an accelerated 
rate as compared with constant capital.* Variable capital 
diminishes more rapidly than total capital increases. Increased 
accumulation and concentration of capital are regarded as the 
source of this new change in the composition of capital. We 
are not furnished with the proofs of the alleged fact, nor have 
we any convincing account of causes. 

"^Capital, 363-4. ''■Ibid., p. 636. 

^ Ibid., p. 639, * Ibid., p. 643. 



I04 GERMAN WAGE THEORIES [^qo 

But the third proposition that surplus population increases 
more rapidly than the diminution of the variable part of capital/ 
is in greater need of demonstration than the others ; Marx, how- 
ever, does not supply it. If it were not maintained that varia- 
ble capital was devoted to the support of the laboring population, 
that it is always distributed so meagrely as to supply mere 
encessaries, and that the laboring class had practically no other 
source of supply, it might not appear out of place to hold that 
population managed to exhibit signs of independence of the 
variable capital as the source of its food supply. It would be 
quite easy to believe that there existed no such strict corre- 
spondence between variable capital and population, as to pre- 
vent a slight relative increase or diminution of either. One 
might even admit for population a slower movement than for 
variable capital, the former lagging behind the latter. One 
might doubt whether population could increase in a constant 
ratio as variable capital diminished in the same ratio ; but that 
population should actually increase faster than the variable 
capital diminishes, and that too not for short periods, but con- 
tinually as a permanent movement, and furthermore, that this 
movement should be the natural fruit of accumulation, needs 
a logical statement of social and industrial sequences. But 
this is just what Marx does not give us. There are but hints 
as to the means by which the laboring population is made 
superfluous. Such are the magnitude of social capital, the 
degree of its increase, the extension of the scale of production, 
and of the mass of laborers set in motion, and the greater 
breadth and fullness of all sources of wealth. 

These doctrines, supported by such reasonings, constitute 
the theoretical bases for Marx's law of wages. In this view, 
surplus population is a necessary product of accumulation. 
There is provided an industrial reserve army which it is for 
the interest of capital to have on hand for new enterprises, and 
as a general source of exploitation. 

^Capital, p. 650. 



40 1 ] THE SOCIALISTS IO5 

Marx thinks that he has here hit upon the true explanation 
of general wages, which must be distinguished from any ex- 
planation of local wages. When the older economists ex- 
plained a rise of wages as a consequence of increase of capital 
over population, and a fall of wages as a consequence of in- 
crease of population over capital, representing the population 
as in prosperous times increasing its numbers but in times 
of misery and want checking the increase, the explana- 
tion employs a local or temporary cause to account for a 
general or permanent movement. A working population 
tends to distribute itself over the entire field of production in 
obedience to the desire for the largest gain. Where capital is 
found in relative abundance, there capital tends to accumulate; 
and if the movement has given any locality a population rela- 
tively too large, wages fall and population tends to diminish. 
This, Marx says, is an accurate description of the relation be- 
tween wages and the distribution of population over the differ- 
ent spheres of production. But it would be untrue to conclude 
that for all society when wages rise, population increases by 
reason of fewer deaths and more births per thousand; and that 
wages again fall as a result of a redundant population, because 
" before, in consequence of the rise of wages, any positive in- 
crease of the population really fit for work could occur, the 
time would have passed again and again." ^ 

The other great exponents of German socialism were Rod- 
bertus and Lassalle. Nothing but the briefest notice of their 
views can be given here. Rodbertus, like Marx, was a master 
mind, and it is noteworthy that, working quite apart, they 
came to much the same conclusions on many important points. 
Rodbertus, when he seriously compares modern laborers with 
slaves, states as strongly as possible the minimum support of 
labor as a determinant of wages. He regards the unlimited 
right to the fruit of one's own labor as the natural basis and 
essence of property right. He says that this principle is con- 

' Capital, p. 651-3. 



I06 GERMAN WAGE THEORIES [402 

tinuously violated, in connection with the ownership of land 
and capital, by the present legal economic arrangements. 
That laborers have the fruit of their labor transferred to others 
is due to positive law and continual force.' Under slavery, the 
force, instead of being exercised by positive law, was exercised 
by the masters. They took the product, but gave the slave only 
as much as was necessary for the continuation of his labor. 
How is it under the present regime, when all the soil and all 
the capital have been made subject to private property? As 
under slavery, the product belongs not to the laborers, but to 
the lords of capital and land. As under slaverj'-, laborers 
are comparatively happy if they secure from the product of 
their own labor such a part as is required for Hfe's support; 
i. e., for the continuation of their labor. If it is said that in 
place of slave possession we have free contract, it must be an- 
swered that the contract is only formally free. Hunger has 
taken the place of the whip. What was formerly called fodder 
is now called wages.^ 

This doctrine has become a fixed article in the theoretical 
economic creed of the German working men, largely through 
the agitation of Lassalle, who never lost an opportunity to 
enforce upon the Germans that their wages were down to the 
subsistence point, and that they were kept there, under pres- 
ent economic arrangements, by a law as inexorable as iron. 
As an authority for, and an expositor of, this law he appealed 
to Ricardo. If wages rise above the minimum more laborers 
are born into the world, and competition reduces their re- 
muneration. If wages fall below the minimum labor popula- 
tion fails at the source, and again demand causes wages to rise. 

It v/ill not escape notice that on this point Marx and Las- 
salle were in opposition. Marx endeavored to strike deeper. 

^ Das Kapital, 1884, p. 214-5. 

"^ ZurBeleuchtung der SociaUn Frage, 1875, P- 33* 



CHAPTER VII 



SCHULZE-GAEVERNITZ 



The reaction against the wages-fund theory, which was first 
expressed by Hermann and and carried on by Brentano and 
others, is issuing forth in a group of thinkers of which 
Schulze-Gaevernitz ' is an important member. The earlier 
reactionists drew attention away from past accumulation in the 
hands of employers, as the true source of wages, to that of the 
consumers' income, which is devoted to the purchase of lab- 
orers' product. The latest development of wage theory in 
Germany holds the so-called residual theory, and points to 
the conclusion that in the evolution of centralized industry 
(Grossbetrieb) there falls to labor a continually more favorable 
share of the product. This view is summarized in three pro- 
positions : 

(a) In respect to any given product the amount of reward 
which accrues to capital decreases, not only absolutely, but also 
relatively to labor. 

(d) The amount which accrues to labor decreases absolutely 
with reference to a single product, but increases relatively. 

(c) Within a defined product the amount falling to both 
capital and labor absolutely decreases with the development of 
centralized industry. The process is a cheapening of produc- 
tion in favor of the consumer. 

(d) The increase of the national product makes possible for 
labor and capital an absolutely greater return, with the de- 
velopment of industry, but the share of capital relatively 
decreases, that of labor relatively increases.^ 

1 See his Z>er Grossbetrieb, 1892. '^ Der Grossbetrieb, p. 224. 

403] 107 



I08 GERMAN WAGE THEORIES {A'^A 

It is held that in the earlier period of the modern industrial 
evolution the laboring classes still belonged psychologically to 
an earlier date. Their wages were more or less near to the 
so-called life minimum.^ The great pioneers of industry, with 
disposable capital in their hands, had a double advantage. 
First, the new order of things with its high demand for capital 
gave its possessors a high bargaining power. Hence, interest 
was extrordinarily high. Secondly, the talent brought to bear 
in the new fields, being of a rare and special quality, deserved, 
and was able to obtain, great rewards. Both these forces, 
when united in the same individuals, as they usually were, in 
reference to the ownership and management of a given body 
of capital, gave them such advantage in the industrial order 
that the additional values created by the new organization 
fell easily into their hands. They may be said to have re- 
ceived the remainder after the usual costs were paid. 

Since that initial period of capitalistic production to the 
present time a great change has occurred. Now capital has 
increased enormously and interest has been gradually falling 
for many years. And talents which were once so rare no 
longer enjoy the monopoly of old.^ The characteristics of the 
early period were: high costs due to high interest and high 
prices, together with high profits due to the element of 
monopoly.^ Our author justifies this regime on the grounds 
that in no other way could the great masses of capital, which 
were necessary for the successful conduct of business in the 
new order, be brought together, that the habits and tradi- 
tions of an earlier time favored a comparatively inferior order 
of men in the industrial field, and therefore the large accumu- 
lations with high profits were necessary to win capable heads 
for industrial callings, and, furthermore, that these capable 
heads came to have political influence, and social development 
was pushed forward through the exercise of political power by 

^ Schulze-Gaevernitz, Der Grossbetrieb, p. 215. 

•^lbid.,^.2\Z. ^Jbid.,^.2iT. 



405] SCHULZE-GAEVERNITZ IO9 

the industrial element. In contrast with the characteristics of 
the opening period of modern industry, the present shows low 
costs due to low interest, and the substitution of more produc- 
tive capital for labor; low prices with an advantage to the 
poor consumer, the laborer, whose real wages are thereby in- 
creased.^ The struggle to lower costs is a leading motive and 
agency in centralized industrial development. A similar 
amount of capital, because of technical advance, produces 
more than it did fifty years ago. Interest and profit have not 
advanced, hence the increasing surplus must be going to labor." 
Edward Atkinson, whom Schulze-Gaevernitz so often quotes, 
puts the case as follows : Wages are a remainder from the sale 
of the product. To ascertain the share of labor the following 
deductions must be made : 

1. Replacement of capital used. 

2. A sum equal to the average rate of profit on capital in- 
vested in the very safest securities, and enough in addition to 
cover risks. 

3. Cost of materials. 

4. Cost of the very best administration. 

5. Taxation. 

The remainder constitutes the wages of labor, whatever that 
remainder may be. Wages constitute all there is left, and 
under the inexorable law of competition of capital, the profits 
of capital are constantly tending to a minimum, while the rate 
and purchasing power of wages are constantly tending to a 
maximum.' 

Let us now consider first the implication of these views, and 
then show their bases in theory. That laborers are abso- 
lutely better off now than they were in the early part of the 
century, there can be little doubt. But that the growing 
advantages of civilization are being secured more fully by the 
laboring classes relatively than by the other classes in society 

^Schulze-Gaevernitz, Der Grossbetrteb, p. 219. "^ Ibid. 

'Atkinson, The Distribution of Products ^ 1885, p. 70. 



no GERMAN WAGE THEORIES \A'^ 

is by no means free from dispute. The question cannot be 
discussed properly apart from a consideration of the relative 
numbers in the social classes — those who live directly on the 
proceeds of capital, and those who depend upon the proceeds 
of manual labor. Marx' contention that there always exists a 
reserve army, although he may not have correctly traced a 
causal connection between the growth of such a reserve and 
accumulation, has enough truth in it to make the problem of 
the unemployed one of grave concern. Concentration of indus- 
try is certainly eliminating the small producer and small dealer 
and converting them into laborers. If the class laborers is 
constantly growing relatively larger, and the class capitalists 
is growing relatively smaller, the returns to capital, though 
relatively less per unit, could secure to the capitalist relatively 
more as a whole than the laborer progressively receives. The 
question of concentration of property is of great importance, 
because we desire to know not so much the progressive return 
to capital, as the progressive return to the capitalist. 

Moreover, the annual wealth of a country is by no means 
measured by the products of manufacture, agriculture and 
trade — using these terms even in a wide sense ; but must in- 
clude the increase of the value of what from one standpoint 
may be called idle property. Such are city lots and other 
property that increase in value annually by mere situation 
and growth of population. These increased values accrue to 
persons as owners. Laborers have small share in these 
increments. 

Further, it is not certain what these authors mean by capi- 
tal. What is often called capital, and upon which the usual 
rate of interest is computed, is so often mere " water," and rep- 
resents no real investment, but results from capitalization. 

It is not, however, with the alleged fact of the relative gain of 
capital and labor in growing industry that we have in this essay 
primarily to do ; but rather with the law of wages according 
to which the result is said to issue, viz., that wages are the 
residual share of the total national income to be distributed. 



40/] SCHULZE-GAEVERNITZ HI 

So far as known to the present writer, no German author 
has formulated in detail the grounds of this theory. But since 
the residual wage theory is the basis of Schulze-Gaevernitz' 
work, it is desirable to make some examination of it. 

According to this theory, rent, interest, and profits are each 
governed in amount by independent laws, while wages remain 
as a residual share. The owners of land receive rent, the own- 
ers of capital receive interest, and the owners of undertakers' 
ability receive profits. Rent is fixed in amount by the Ricar- 
dian law. Interest is fixed hy the law of supply and demand. 
Profit, the share of the undertaker as such, which hitherto had 
been confounded with the capitalist's share, has been of recent 
years differentiated as the peculiar reward for initiating and 
"captaining" industry, and has been assimilated to the law of 
rent for the use of land. Francis A. Walker, who called profits 
the rent of ability, has the credit of being the first clearly to 
expound in detail this theory of profits as well as the residual 
theory of wages. According to this view, profits may be stated 
in terms of the law of rent; profits are determined by the dif- 
erences existing in the productiveness of different abilities or 
opportunities of employers engaged at the same time in sup- 
plying the same market.^ Profits range from the return to the 
poorest undertaker, who receives ordinary wages and who is 
called the no-profit undertaker, to the return which is limited 
only by business ability. 

All three shares are so determined that they can in no way 
interfere with the laborer's share. Thus runs the theory: "un- 
less by their own neglect of their own interests, or through 
inequitable laws or social custom having the force of law, no 
other party can enter to make any claim on the product of in- 
dustry, nor can any of the three parties already indicated carry 
away anything in excess of its normal share." ^ This state- 

1 Walker, Political Economy, 3d ed., 1888, p. 236; Marshall, Principles of 
Economics, 2d ed., 1891, Book vii., ch. v,, § 7. 
=* Walker, Political Economy, 1888, p. 251. 



IJ2 GERMAN WAGE THEORIES [408 

merit of the theory has been interpreted to mean that the 
laborer's share is wholly dependent upon the laborer's contri- 
bution to the total product.' This conclusion is not unnatural 
from an exclusive attention to particular parts of Walker's 
work,^ and an endeavor to connect wages and laborer's contri- 
bution from the statement that " wages equal the whole pro- 
duct minus rent, interest and profits."^ But attention to all 
that Walker has written on the question of distribution makes 
it reasonably clear that he did not intend to teach a strictly 
productivity theory. That is, he did not attempt to establish 
any identity between the sum of values received as wages, and 
the sum of values produced by labor in the productive co- 
operation. He attempted to show that, when all the factors 
are working under normal conditions, there is a process of 
carving out shares from the total product by all the productive 
factors except labor; that whatever may remain after the slic- 
ing process is complete goes to labor as its share. If, now, the 
total product is increased by the energy, economy or care of 
labor, assuming no change in the other factors, and assuming 
the absence of friction, that increase goes to labor. In other 
words, if laborers make the total larger, and no change occurs 
in the efficiency of the other factors, the enlargement of labor- 
ers' remainder equals the enlargement of the total. This is an 
identity between an increment of product attributable to labor 
and an increment accruing to wages. At most, by this theory, 
the productivity theory applies to an increment and does not 
extend to total wages. " So far as by their energy in work, their 
economy in the use of materials, or their care in dealing with 
the finished product, the value of that product is increased, that 
increase goes to them by the force of natural laws, provided 
only competition be full and free." * 

1 Journal of Political Economy, v. 2, pp. 77-87, especially pp. 81-2. 

'See especially Wages Question, pp. 129, 130. 

8 Walker, Political Economy, 3d ed,, 1 888, p. 284. 

* Walker, Political Economy, p. 251. 



409] SCHULZE-GAEVERNITZ II3 

The Germans under consideration do not attempt to modify 
in any important particular the main feature of Walker's theory. 
Hence a consideration of this part of German theory calls for 
no extended criticism. Such would be a criticism, not of the 
German work, but of that of President Walker. It may be re- 
marked, however, that an appreciation of the strength of this 
theory requires a careful consideration of wage conditions for 
short and for long periods of time. Attention to that differ- 
ence might have saved some criticisms. Walker admits that 
for short periods his theory does not hold true. 

When we have made all allowances, the theory fails to 
satisfy the mind completely. An efficient competition of capi- 
tal is assumed, while the equally at times efficient competition 
of labor is minimized. Money wages are for the most part in 
the author's mind, and there is hence a lack of definiteness as 
to the true relation of capital to wages, and no determination 
of consumable goods as the source of real wages. 



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Greater New York a Century Hence. 

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